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Post-disaster cash settlement: the pitfalls

As a result of the 2010-2012 Christchurch earthquakes in New Zealand, more and more Canterbury policyholders are settling their earthquake claims in cash. Insurers began to aggressively pursue cash settlement in 2014 in an attempt to cash settlement as many claims as possible. As a consequence of insurers’ slowness in settling property claims, frustrated, stressed, and impatient policyholders run the risk of accepting cash settlements without regard to the escalation allowance between the time of accepting the settlement offer and the moment when the construction contract has been correctly fulfilled. appraised and appraised. Add to this the invisible damage and no-cost foundations along with potential hyperinflation in materials and labor (increased demand) as the post-earthquake recovery phase accelerates. This is a very worrying development and any homeowner looking to settle in cash should think seriously before entering into any such deal. At least independent legal or technical advice should be sought. At a minimum, make sure you understand the difference between total reinstatement costs (actual costs associated with building a similar home) versus settlement value (fair market value of property). For you, the owner, there is a significant risk of unfunded cost overruns, as repairs or rebuilds are limited to a “notional” claims position rather than the actual cost of the repair or rebuild. Insurers and their project management companies are making “best estimate” concessions for foundations, especially on damaged land, and cost overruns can cost tens of thousands of dollars.

A cash settlement represents the ‘actual cash value’ of the loss, which is the lowest value of the used property compared to new ones, for example bathroom cabinets that are ten years old are worth less than new bathroom cabinets. kitchen, so its actual cash value is less than cost. of new cabinets. Homeowners, to be fully protected, have generally purchased full replacement policies in many cases that are designed to pay for the full replacement cost even if the cost is more than the current value of the item. -Cost policy, the owner is entitled to new bathroom cabinets in lieu of the difference between the actual cash value of the old cabinets and the price of the new ones.

Cash settlement is the situation where your private insurer pays you a sum of money to settle your insurance claim. Then you make the decision to spend the money by hiring the contractors yourself to repair or rebuild your home, subject to the limits set in the terms of the agreement by the insurer or private lender. If there is a mortgage on the property, the mortgagee’s approval will be required.

Also keep in mind that if you decide to make a cash settlement, your current home insurance policy will be reviewed and could be canceled as part of that final settlement. The settlement amount is the cost of reinstalling your home less any excess insurance you still owe.

The big difference between the two is this: in a replacement policy, the cost of a home’s replacement value is set by the construction industry; In a cash settlement policy, the home’s value is set by the housing market.

Insurance companies know from experience that many homeowners are naive or ignorant about the claims process and are willing to accept the first offer made to them. The homeowner is often led to believe that the necessary work can be done for less than the insurer offers. No wonder adjusters suggest that the owner do the work himself and pocket the difference. Remember that the only valid price in the repair and replacement insurance is the price for which the specialists who are going to carry out the work agree to work !!

Insurers often pay former quantity contractors / inspectors to provide estimates when it is so obvious that the contractors would never be able to do the work for the amounts stated. Its purpose is simply to provide the insurer with third party “credibility” by providing a number that the insurer / adjuster can use to negotiate with the owner. Therefore, it is critical that homeowners have written offers / quotes from respected contractors who Will be doing the work for those amounts. Do not accept quotes. They are simply “guesswork.” For example, paint is almost always included in insurance losses and most of the time adjusters use a flat rate per square meter. Consider the following scenario. A bird fell from its earthquake-damaged chimney and became covered in soot and covered several of its high-spec painted walls and ceilings with soot. The fitter then measures the room and calculates the square footage. He lets say $ 340.00 and tells you this is what the insurer will allow. But what it doesn’t tell you is that in your computation you have failed to compute a stack of other items. Painting rarely involves simply applying paint to the wall. What about the quality of the paint, the condition of the walls, the preparation for painting, the nooks and crannies, the removal of furniture, switches, light fixtures, bookshelves, doors, windows, trim, tapestries, removal / replacement of curtains and the list goes on? . Any of these items will seriously change the price of painting this room. If all of these items were included in the quote as they should have been, then the sum would look significantly different than what the adjuster quotes. However, you, the landlord, will have to pay that last sum when you go to repair your home. None of these items can be determined over the phone or calculated using a specific quantity per square meter. They are also not allowed by the insurer’s “estimating software”.

To determine an actual price, the painter would have to come and inspect the work involved, determine what is required (to satisfy it), and then submit a detailed quote for you to accept. The same will be required for all other areas of the home that require work.

The calculation of the sum will depend on the insurance policy. For this reason legal advice is recommended. Most likely, the amount you are offered is just the insurer’s ‘estimate’ of what it will cost to repair or rebuild (if it is a total economic loss) your property. The ideal situation is to have your own appraisal, appraisal or independent appraisal of the property. The insurer does not have the exclusive right to inform you what you are entitled to. Insurers will try to use “fictitious” repairs to justify smaller payments. In fact, there are experts who would say that if there is structural damage never accept a cash offer. Neither you nor the insurer can be sure of all the necessary building damage and restoration. If your cash offer is not a realistic repair or replacement, the difference is YOUR loss and the insurer’s profits and that is not why you bought your policy.

If you are doing a cash settlement, you will encounter the following challenges:

Benefits of cash settlement:

  • You will have complete management of your repair or reconstruction, which can speed up the process, but this will also mean that you will have to manage the project yourself, you will have to organize your own work insurance contract and you will run the risk of cost overruns as well as risks. technical and other types of the project. If the insurance company chooses the contractor, you have the insurance company to turn to if the contractor does not complete the work or does not provide quality work.
  • You may find it easier to incorporate non-earthquake repairs or renovations.

Problems associated with cash settlement:

  • You will have to manage the project yourself. You will have to organize your own employment insurance contract and bear the risk of cost overruns, as well as technical and other risks of the project. You may have to pay for professional project management;
  • Your insurer may only be willing to pay you for “like-the-same” rather than “like-new” repairs or rebuilds, which will mean that you won’t be able to replace what you had at current money, as costs will have increased;
  • If more earthquake damage is discovered during your repair, you will need to re-engage with your insurer; It is for this reason that homeowners should not sign complete and definitive agreements with their insurer;
  • You will be liable for any shortfalls in the situation where your repair or rebuilding costs exceed your cash settlement due to increased demand and increased construction costs;
  • If you decide not to repair or rebuild, your insurance coverage may be compromised and the future sale of the property may also be compromised;
  • Do not assume that the amount provided by the insurer is adequate; for example, unidentified damages will not have been taken into account. In the case of replacement or total loss, a low valuation provided by an appraiser that may be withheld by the insurance company will not reflect the true value of the property. Also be aware of the overly optimistic estimates from builders and repair companies who have no real intention of doing the job themselves;
  • In the Christchurch scenario, two of the biggest hidden risks in cash settlement are the liquidation of the building in relation to Christchurch City Hall flood levels and the lateral movement of the building in relation to legal limits. In order to determine both against the right of an insurance policy, a detailed lift assessment is required to determine how much the building has settled in height and how much the building has moved in relation to the legal limits;
  • Without knowing both, homeowners who have paid off cash find to their dismay that their home is now considered flood-prone and uninsurable, and in some cases, their home is also now over the legal limit and trespassing on neighbors. . property. No cash settlement amount for cosmetic (or even structural) repairs will provide the funds to raise the entire building in height and return it to the correct position as required by legal law under a full replacement insurance policy;
  • It is prudent for the owner to obtain independent evaluations from all the required experts before even contemplating a cash settlement. Unless, of course, the Insurer assumes the risk and the cash settlement is for a total reconstruction of the house according to the policy. That would eliminate any transfer of risk to the owner.

It is important that you receive full reinstallation costs, so have quotes ready to show the costs involved.

Discuss your cash settlement with your mortgage lender and legal advisor. Check your policy carefully to make sure nothing has been lost: accommodation allowance, storage costs, stress benefits, death benefits, etc. One thing you can count on is that the insurer is unlikely to tell you what your full rights are if you don’t claim them.

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