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Post-Disaster Cash Settlement: The Pitfalls

As a result of the Christchurch earthquakes in New Zealand between 2010 and 2012, an increasing number of Canterbury policyholders pay 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 result 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 signed accurately. appraised and appraised. Add to this unseen damage and no-cost foundations along with possible 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 think seriously before entering into such an agreement. At least independent legal or technical advice should be sought. At a minimum, make sure you understand the difference between full restoration costs (actual costs associated with building a similar home) and severance value (market value of the property in good condition). For you, the owner, there is a 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” concessions for foundations, particularly on damaged land, and 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 the property used compared to new, for example, bathroom cabinets that are ten years old are worth less than new kitchen cabinets. kitchen, so its actual cash value is less than cost. Homeowners, to be fully protected, have typically purchased full replacement policies in many cases, which are designed to pay the full cost of the replacement, even if the cost is more than the actual value of the item. , the owner is entitled to new bathroom cabinets instead 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 limits set 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 may be canceled as part of that final settlement. The settlement amount is the cost to restore your home minus 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 value of a home is established by the real estate market.

Insurance companies know from experience that many homeowners are naive or ignorant about the claims process and are prone to accepting the first offer made. Often, the owner is led to believe that he can do the necessary work for less than what the insurer offers. 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 that the specialists who are going to carry out the work agree to work on!!

Insurers often pay former contractors or inspectors lump sums to provide estimates when it is so obvious that the contractors will never be able to do the work for the stated amounts. Its purpose is simply to provide the third-party insurer with “credibility” by providing a number that the insurer/adjuster can use to negotiate with the owner. Therefore, it is critical that homeowners have written bids/quotes from respected contractors who Will will be performing the work for said amounts. Do not accept estimates. They are just ‘guesses’. For example, paint is almost always included in insurance losses and most of the time adjusters use a flat rate per square foot. Consider the following scenario. A bird fell down the quake-damaged chimney and became covered in soot, coating several of its high-spec painted walls and ceilings with soot. The adjuster then measures the room and calculates the square footage. He lets say $340.00 and tells her that this is what the insurer will allow. But what he doesn’t tell you is that in his calculation he has failed to calculate a lot of other games. Painting rarely involves simply applying paint to the wall. What about paint quality, condition of walls, preparation for painting, nooks and crannies, furniture removal, light switches, light fixtures, shelves, doors, windows, moldings, wall hangings, 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 meter. Neither do the insurer’s ‘estimating software’.

To determine an actual price, the painter would have to come in and inspect the work involved, determine what is required (to satisfy you), and then present you with an itemized quote for you to accept. 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) her property. The ideal situation is to have your own independent appraisal, appraisal or appraisal of the property. The insurer does not have the exclusive right to tell her what she is entitled to. Insurers will try to use “dummy” repairs to justify smaller payments. In fact, there are experts who would say 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 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 organize your own labor insurance contract and you will bear the risk of cost overruns and as well as 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 doesn’t 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 handle yourself. You will need to arrange your own labor insurance contract and will bear the risk of cost overruns as well as technical and other project risks. You may have to pay for professional project management;
  • Your insurer may only be willing to pay you for “as is” repairs or rebuilds rather than “as 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 full and final agreements with their insurer;
  • You will be responsible for any shortfall in the event repair or reconstruction costs 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 jeopardized and the future sale of the property may also be jeopardized;
  • Do not assume that the sum 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 retained 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 building settlement relative to Christchurch City Council flood levels and lateral movement of the building relative to legal limits. To determine both versus entitlement to an insurance policy, a detailed topographical 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 liquidated cash realize 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 occupants. neighbours. 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 in the correct position 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 bears the risk and the cash settlement is for a total rebuild of the home under policy entitlement. That would eliminate any transfer of risk to the owner.

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

Discuss your cash settlement with your mortgage lender and legal advisor. 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 her rights are if she doesn’t claim them.

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