Post-Disaster Cash Liquidation: The Pitfalls

As a result of the Christchurch earthquakes in New Zealand between 2010 and 2012, more and more Canterbury policyholders are paying cash for their earthquake claims. Insurers began aggressively pursuing cash settlement in 2014 in an attempt to settle as many claims as possible in cash. As a consequence of insurers being slow to settle property claims, frustrated, stressed and impatient policyholders are at risk of accepting cash settlements without regard to the increase allowance between the time they accept the settlement offer and the time when the construction contract has been precisely signed. appraised and appraised. Add to this invisible damage and free 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 owner wishing to settle in cash should seriously think before entering into such an agreement. At least independent legal or technical advice should be sought. At the very least, make sure you understand the difference between full restoration costs (actual costs associated with building a similar home) and indemnity value (market value of the property in good condition). For you, the owner, there is great 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 guess” allowances for foundations, particularly on damaged land, and the cost overruns can be in the tens of thousands of dollars.

A cash settlement represents the “actual cash value” of the loss, which is the lower value of used property compared to new, 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 its cost. Homeowners, in order to be fully protected, have often purchased full replacement policies in many cases, which are designed to pay the full cost of replacement, even if the cost is greater than the actual value of the item. , 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 in settlement of your insurance claim. You then make the decision to spend the money hiring contractors to repair or rebuild your home, subject to the limits set forth in the terms of the agreement by the private insurer or 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 settle in cash, your current home insurance policy will be reviewed and could be canceled as part of that final settlement. The settlement amount is the cost to restore your home minus any insurance excesses you still owe.

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

Insurance companies know from experience that many homeowners are naive or ignorant of the claims process and are likely to accept the first offer made. Often, the homeowner is led to believe that he or she can do the necessary work for less than what the insurer is offering. It is not uncommon for adjusters to 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 agreed to work by the specialists who are going to carry out the work!

Insurers often pay former contractors or quantity inspectors to provide estimates when it is so obvious that the contractors will never be able to do the work for the amounts indicated. 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 reputable contractors who willpower will be carrying out the work for said amounts. Do not accept estimates. They are just ‘assumptions’. For example, painting is almost always included in insurance losses and adjusters most often use a flat fee per square foot. Consider the following scenario. A bird fell down the earthquake damaged chimney and became covered in soot and soot covered several of its high specification painted walls and ceilings. The adjuster 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 he doesn’t tell you is that his calculation has failed to calculate a lot of other games. 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, light switches, light fixtures, shelves, doors, windows, trim, upholstery, drapery removal/replacement and the list goes on? . Any one 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 from the adjuster’s quote. However, you, the owner, will have to pay that last amount when you go to repair your house. None of these items can be determined over the phone or calculated using a specific amount per square foot. Neither do the insurer’s ‘estimating software’ allow it.

To determine an actual price, the painter would have to come and inspect the work involved, determine what is required (to satisfy you), and then present you with a detailed quote for your acceptance. The same will be required for all other areas of the house 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 independent valuation, appraisal or appraisal of the property. The insurer does not have the exclusive right to tell you what it is entitled to. Insurers will try to use “dummy” repairs to justify smaller payments. In fact, there are experts who would say that if there is structural damage, never accept an all-cash offer. Neither you nor the insurer can be sure of all the necessary building damage and restoration. If your cash offer falls short of a realistic repair or replacement, the difference is YOUR loss and the insurer’s profit and that’s not why you bought your policy.

If you settle in cash, you will encounter the following challenges:

Benefits of cash settlement:

• You will have complete management of your repair or rebuild, which can speed up the process, but this will also mean: you will have to manage the project yourself, you will have to arrange your own work insurance contract and you will bear the risk of cost overruns and as well as the technical and other risks 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 job or 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 yourself. You will need to arrange your own employment insurance contract and will 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-new” repairs or rebuilds rather than “like-new,” meaning you can’t replace what you had with today’s money, as costs will have increased;
• If more earthquake damage is discovered during the repair, you’ll need to re-enter discussions with your insurer; it is for this reason that homeowners should not sign complete and final agreements with their insurer;
• You will be responsible for any shortfall in the situation where your costs to repair or rebuild are greater than your cash settlement due to increased demand and increased construction costs;
• If you choose 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 damage will not have been taken into account. In the case of replacement or total loss, a low appraisal provided by an appraiser who may be withheld by the insurance company will not reflect the true value of the property. Also be aware of overly optimistic estimates from builders and repair companies who have no real intention of doing the work themselves;
• In the Christchurch scenario, two of the biggest hidden risks in cash settlement are the liquidation of the building relative to Christchurch City Council flood levels and the lateral movement of the building relative to legal limits. To determine both against the entitlement of an insurance policy, a detailed survey assessment is required to determine how much the building has settled in height and how much the building has moved relative to legal limits;
• Knowing none of this, homeowners who have settled 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 encroaching on the neighbors. property. No amount of cash settlement for cosmetic (or even structural) repairs will provide the funds to have the entire building raised back in height and repositioned as required by legal right under an insurance policy full replacement;
• It is prudent for the owner to obtain independent evaluations from all required experts before even contemplating a cash settlement. Unless, of course, the insurer assumes the risk and the cash settlement is for a total home rebuild under policy entitlement. That would eliminate any transfer of risk to the owner.

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

Discuss your cash settlement with your mortgage lender and legal counsel. Review your policy carefully to make sure you haven’t missed anything: 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 all of her rights are if she doesn’t claim them.