Cash Settling Post-Disaster: The Pitfalls

As a result of the New Zealand Christchurch earthquakes 2010-2012, more and more Canterbury policyholders are cash settling their earthquake claims. Insurers began to aggressively pursue cash settlement in 2014 in an attempt to cash settle as many claims as possible. As a consequence of the slowness of Insurers to settle property claims, the frustrated, stressed and impatient policyholders are at risk of accepting cash settlements without consideration for the escalation allowance between the time of accepting the settlement offer and the time the construction contract has been accurately assessed and priced. Add to this the unseen damage and un-costed foundations coupled with potential hyperinflation in materials and labour (demand surge) as the recovery phase post earthquakes accelerates. This a very concerning development and any homeowner wanting to cash settle should think seriously before entering into any such agreement. One should at least seek independent legal or technical advice. At a minimum make sure that you understand the difference between full reinstatement costs (actual costs associated with building a like-for-like home) versus indemnity value (market value of the property in undamaged condition). For you the homeowner there is a major risk of unfunded cost overruns as repairs or rebuilds are scoped to a “notional” claims position rather than to actual cost of the repair or rebuild. Insurers and their Project Management Companies are making “best guess” allowances for foundations, particularly on damaged land, and cost overruns can be tens of thousands of dollars out.

A cash settlement represents the ‘Actual cash value” of the loss which is the lower value of used property compared to new e.g. bathroom cabinets that are ten years old are worth less than new kitchen cabinets, so their actual cash value is less than the cost of new cabinets. Homeowners, in order to be fully protected, have usually bought full-replacement policies in many cases which are designed to pay the full cost of replacement even if the cost is of greater value than the item’s current value. Under a replacement-cost policy, the homeowner is entitled to new bathroom cabinets rather than the difference between the actual cash value of the old cabinets and the price of new ones.

Cash settlement is the situation in which your private insurer pays you a sum of money in settlement of your insurance claim. You then make the decision to spend the money by either engaging contractors yourself to repair or rebuild your home, subject to any limits placed on the terms of the settlement by the private insurer or lender. If there is a mortgage on the property, then approval from the mortgagee will be required.

Also note that if you should choose to cash settle, the insurance policy on your current house will be reviewed and could be cancelled as part of that final settlement. The settlement amount is the cost to reinstate your home less any insurance excesses still owing.

The big difference between the two is this: in a replacement policy a house’s replacement value cost is set by the construction industry – in a cash settlement policy a house’s value is set by the real estate market.

Insurance companies know from experience that many homeowners are naive or ignorant about the claims process and are apt to accept the first offer made to them. Often the homeowner is led to believe that they can have the necessary work done for less than the insurer is offering. It is not unheard of adjusters suggesting the homeowner do the work themselves and pocket the difference. Remember that the only price that is valid in insurance repair and reinstatement is the price that the specialists who are to undertake the work agree to work for!!

Insurers often pay former contractors/quantity surveyors to provide estimates when it is so clearly obvious that contractors would never be able to do the job for the sums indicated. Their purpose is to simply provide the insurer with third party ‘credibility’ by supplying a number that the insurer/adjuster can use to negotiate with the homeowner. Hence it is critical that homeowners have written bids/quotes from respected contractors who will be carrying out the work for those amounts. Do not accept estimates. They are simply ‘guesses’. For example, painting is almost always included in insurance losses and more often than not adjusters use a flat rate per square meter. Consider the following scenario. A bird has fallen down your earthquake damaged chimney and covered itself in soot and coated several of your high specification painted walls and ceilings with soot. The room is then measured by the adjuster and the square meterage calculated. He allows say $340.00 and tells you this is what the insurer will allow for. But what he does not tell you is that in his calculation he has failed to calculate a pile of other items. Painting rarely involves merely applying paint to the wall. What about the quality of paint, the condition of the walls, preparation for painting, nooks and crannies, furniture removal, switches, lighting fixtures, shelving, doors, windows, mouldings, wall hangings, removal/replacement of curtains and the list goes on. Any of these items will seriously change the price for 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 from the one the adjuster quotes. Yet you the homeowner are going to have to pay that latter sum when you go to repair your home. None of these items can be determined over the phone or computed using a specific amount per square meter. Nor do the insurer’s ‘estimate computer programmes’ allow for them.

In order to ascertain a true price the painter would have to come and inspect the work involved, determine what is required (to satisfy you) and then present a detailed quote for you to accept. The same will be required for all other areas in the home that require work.

The calculation of the sum will depend on the insurance policy. For this reason legal advice is recommended. More likely than not, the sum offered to you will only be the insurer’s ‘estimate’ of what it will cost to repair or rebuild (if a total economic loss) your property. The ideal situation is to have your own independent valuation, assessment or appraisal of the property. The insurer does not have the sole right to inform you of what you are entitled to. Insurers will try to use “fictional” repairs to justify smaller payouts. In fact there are those experts who would say that if there is structural damage never take a cash offer. Neither you nor the insurer can be sure of all the damage and building restoration required. If their cash offer is short of a realistic repair or replacement the difference is YOUR loss and the insurers profit and that is not why you purchased your policy.

If you cash settle you will encounter the following challenges:

Benefits of Cash settlement:

you will have full management of your repair or rebuild which may speed the process up but this will also mean – you will 소액결제 현금화 have to project manage yourself, you will need to organise your own contract work insurance and you will bear the risk of cost overruns and well as technical and other project risks. If the insurance company chooses the contractor, you have the insurance company to fall back on if the contractor fails to complete the job or fails to provide quality work.