Know your rebuild costs ...or else!

[Sali]

I 'phoned Direct Line today for a quote on house insurance. When I'm asked about rebuild costs I usually quote the cost a little under the market value, even though I know that rebuild costs are significantly lower. However, today the conversation went a little further and I was told that if I gave an inaccurate figure, Direct Line would penalise me. So, for example, I quote £200K, I have to claim and it turns out the rebuild costs were actually only £100K. Direct Line would then punish me for my caution by only paying out £50K. So not only would I potentially pay higher premiums initially (my fault) but then I'd have to fork out the balance that they wouldn't pay.

 

The sales girl told me to refer to my original mortgage document for the figure, but when I pointed out that this was a few years old and unlikely to be accurate, she suggested I use the BCIS on-line calculator. The BCIS calculator requires you to know, among other facts, the square meterage. God only knows what the penalty would be if you got this wrong.

 

Direct Line told me that this was regulation imposed on them by the FSA. Well, I have now written to the FSA on this matter for clarification.

 

I'm sick of hearing of scenarios where claimants fail to receive payouts because of some small omission or oversight innocently made when the policy was taken out, and which has no bearing on the actual claim.

 

One particular case I heard on the radio was of a man who had failed to put some medical fact on his application form, then later died of carbon monoxide poisoning because of a faulty boiler. The insurance company refused to pay out the widow, even though the medical fact was completely unrelated to the cause of death.

 

It seems to me that insurance companies spend huge amounts of time picking over the bones of a policy to find reasons NOT to pay out...and what makes it worse is that the Ombudsman usually supports them! Where is the commonsense and fairness in all of this? The insurance system needs a massive overhaul.

[unclebulgaria67]

I doubt you will get a response from the FSA, as they don't really deal with individual consumer queries.

 

The silly thing is that if you don't know the rebuilding cost, you can obtain Insurance elsewhere for unlimited Buildings Insurance or £1 million sum insured. Tesco Insurance currently underwritten by UKI who are part of RBS Insurance as are Direct Line, offer a £1 million sum insured policy. From what I have seen in the past Tesco rates are very similar to Direct Lines.

 

The person from Direct Line is correct. It is up to the consumer to find out the rebuilding cost and if they get it wrong, any claim payment could be reduced or for gross underinsurance, they might not pay out at all.

 

It is against FSA rules for Insurers telephone sales advisors to offer any advice on rebuilding costs, apart from to give general advice about where to find the information. For high value risks only, Direct Line and other companies will occasionally send out qualified assessors to estimate Insurance values.

 

It was you telling the DL person that you guessed your rebuilding cost, that led to them giving the advice they did. You cannot guess the value, it must be made on information that is part of a factual assessment. The BCIS guide is only suitable for standard risks and when you use it, it gives you guidance on how to use it. It would not be suitable for certain rebuilding types, properties which have more than two storeys. A property that is built of Cotswold stone, will cost far more to rebuild than a standard brick house, so the guide will not be any good. In some parts of the country, there are houses that cost more to rebuild, than their market values. For example in some parts of Wales, you might find a terraced home, that would cost substantially more to rebuild than the price it would sell for.

 

So in summary if the FSA do read your letter, I think they will meet it with a positive response.

Edited August 21, 2010 by unclebulgaria67

[Sali]

I just think that many people would probably over estimate rebuild costs without ever considering the implications. I wouldn't mind if Direct Line would be losing out financially in some way; but they are likely to pick up extra premiums if you give a near market value, as it will almost certainly cover the rebuild costs. If the rebuild costs were more than my estimate, I would quite understand that I had to cough up the difference. To me it just shows how pedantic they are. Direct Line lost me as a customer today...not that they are likely to care!

[unclebulgaria67]

Just checked the Direct Line site. Their standard Buildings cover is for £1 million, with unlimited cover provided under their Home plus offering.

 

I suspect that they ask for the rebuilding cost, just to check the risk that they are quoting on and that it is below the £1 million standard cover.

 

Perhaps the problem you had, was that you were given a poor explanation by the Direct Line sales person and this led to your annoyance.

[JonCris]

The only time they will underpay is if you under insurer The person you spoke to is clearly not well trained

 

ie insured £100,000

Should be £200.000

 

In the case of even a partial loss they will still only pay 50%. If your loss is £20,000 you will only receive 50%. Its always best to over estimate rather than under estimate provided you understand you'll only receive sufficient to cover the actual loss

 

AND you should review your cover regularly to make certain your not under-insured

[andydd]

I agree, I dont think there is in reality any problem with over-insuring.

 

As a leasehold property the insurance is taken care of by my freeholder/landlord, i have for the last few years been in a dispute about the cost of service charges, the majority of which is the insurance cost, this has risen steeply in the last few years, mainly due to a revaluation which increased the rebuilding cost a lot, it was valued (allegedly) by a local surveyor, who is closely linked to my freeholder/landlord, the landlord also gets a 18% commission so its in everyones interest (except mine!) to insure that the rebnuilding cost is as high as possible, Im convinced it is at least 30% - 50% too high.

 

Andy

[Sali]

The thing is I checked and double-checked with the salesgirl at Direct Line to be sure that I understood what she was saying. She was adamant that if I over estimated the rebuild value then Direct Line would only pay a small percentage of the cost even if it was significantly less than anticipated. I can fully believe that insurance sales people are poorly trained and blag without conscience, but I will not risk becoming their customer

 

If I do receive a response from the FSA, I will post it. I have spoken to other people since and I realise that quite a few people are providing guestimates of rebuild costs.

[JonCris]

The thing is I checked and double-checked with the salesgirl at Direct Line to be sure that I understood what she was saying. She was adamant that if I over estimated the rebuild value then Direct Line would only pay a small percentage of the cost even if it was significantly less than anticipated. I can fully believe that insurance sales people are poorly trained and blag without conscience, but I will not risk becoming their customer

 

If I do receive a response from the FSA, I will post it. I have spoken to other people since and I realise that quite a few people are providing guestimates of rebuild costs.

 

I'm sorry but having worked in the industry & been responsible for making such loss decisions building costs etc I can assure you the opposite is or was the case over estimate no problem underestimate problem % of underestimation would determine % settlement. The only person to 'suffer' when building costs are overestimated is the policy holder they pay a higher premium than they need

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The thing is I checked and double-checked with the salesgirl at Direct Line to be sure that I understood what she was saying. She was adamant that if I over estimated the rebuild value then Direct Line would only pay a small percentage of the cost even if it was significantly less than anticipated. I can fully believe that insurance sales people are poorly trained and blag without conscience, but I will not risk becoming their customer If I do receive a response from the FSA, I will post it. I have spoken to other people since and I realise that quite a few people are providing guestimates of rebuild costs.

I'm sorry but having worked in the industry & been responsible for making such loss decisions building costs etc I can assure you the opposite is or was the case over estimate no problem underestimate problem % of underestimation would determine % settlement. The only person to 'suffer' when building costs are overestimated is the policy holder they pay a higher premium than they need

[Sali]

Well, yes, JonChris, that is logical and sensible, but insurance is often neither. I've just checked on Nationwide's site and got a better deal and wasn't even asked the question on rebuild costs. You have to admit, it does seem that every opportunity is taken by the insurance companies to get out of paying and it just isn't worth taking the risk. I haven't any faith in the Ombudsman, staffed by androids fitted with Intel chips from the 1980s. I'm going to be reading my contract very carefully...probably all 30 pages of it!

[Wulfyn]

There are a few issues with getting your rebuild (or vehicle value) costs incorrect, and it's not just down to under-insuring. Over insuring is a problem too, that is now being picked up on by insurance companies. Once again it is down to a minority of people spoiling it for the masses. There are a few issues with over-insuring:

 

1. Risk Profile

The risk of a property or vehicle does not necessarily decrease just because the amount insured is lower. Whereas at a first glance it makes sense to assume that the risk will be lower because the Sum Insured (and therefore any payout) has decreased, this is not the whole story. Often you find that properties of a certain value can perform worse, because although the severity (the amount of the claim) can be less due to the lower sum insuredvalue, the frequency (the chance of a claim) is increased. Usually this is not a big deal, but when taken in combination with certain other factors it can have a large affect upon acceptance and price. This is more noticeable in Motor insurance than Household.

 

2. Exaggerated Claims

This is probably the biggest area of abuse. People will deliberately over-value their insured items in order to make exaggerated claims, or will unwittingly over-vale their insured items and then take adavtage when a claim occurs. Now of course a lot of people are honest and will not do this, but many people will. What you see is that it looks like certain sum-insured levels perform much worse than you would expect them to because of this fraudulent activity. And unless it is caught by the claims department (which unfortunately is rarely) then there's no way to tell the difference. Pricing mechanisms are always being introduced to counter-act this to try and catch the fraudsters, but the available data is not great.

 

3. Acceptance

There are certain risks that seem too strange to be real, and so therefore the conservative view is to decline them. Would you insure a 2 bedroom terraced house that was in such a poor condition that the value was only £40k? If someone used the market value instead of the rebuild value then it is likely that many insurers would not cover this property, as it would be seen as being too low to be a 'normal' house used in a normal way, but more likely something that has a major problem or is in a poor condition. However if you over-insured then this risk would become acceptable.

 

 

Ok - so that's the explanation on why it is important to get your rebuild cost as accurate as possible. The point is that if you have gotten your rebuild cost srastically wrong then you only have yourself to blame. I don't think it is unrealistic to know the area of your property (most people focus heavily on this when purchasing, any recent report should have it, and otherwise you do have the old option of getting out a tape measure) in order to use the RICS website, but even then you may not get accurate rebuild costs - for example if you live in a terraced house the rebuild cost will include having to pin the properties either side of you whilst yours is rebuilt, a process that could far outweigh the cost of buying a new house. I'd say that it was alarming that the company in question would take that approach (or even could).

 

My advice if you are unsure is to do what you have done - and that is to take up a policy that does not ask for your sum insured but instead provides blanket cover. As a slight alternative the AA ask for the market value of the property rather than the rebuild cost. These products will all remove the need to provide the rebuild cost (and in fact were invented because customers very rarely know their rebuild cost, which to get accurately would require a survey).

[JonCris]

Wulf this may be correct were a single item is concerned jewlery etc & anticipated building costs may be exaggerated when insuring but in the event of a loss the insurer would still only pay the true costs & NOT one based on the orginal estimate assuming that estimate either matches or exceeds the true costs. Underinsuring would be self evident as in the building costs of a terraced property if it didn't allow for supporting adjoining properties

 

Also I doubt declining liability on the grounds that the claimant had paid to much to the insurer will carry little weight with the courts

[vusys1]

if a property is non standard they will ask for the rebuild cost, if the rebuild cost has been over estimated it can have an affect on part of claim because if they had to re house in temp accomadation due to a claim, the amount the insurer would pay towards the costs is based on a percentage of the rebuild cost.

[JonCris]

BEFORE rehousing a Loss Adjuster would determine the ACTUAL building cost on which to base the costs of rehousing Also temporary rehousing is dependant on what is available locally the cost of which may have no bearing on the building costs

[Sali]

if a property is non standard they will ask for the rebuild cost, if the rebuild cost has been over estimated it can have an affect on part of claim because if they had to re house in temp accomadation due to a claim, the amount the insurer would pay towards the costs is based on a percentage of the rebuild cost.

 

My house is not non-standard, but I wish somebody would standardise the insurance companies!

[Wulfyn]

JonCris - you may think that but you are wrong. I have been involved in numerous examples of customers exaggerating claims on rebuilding works. One house was little more than a brick shed. These cases can be surprisingly hard to contest - and in fact even contesting them will increase the cost of dealing with properties of this type. You're also forgetting all of the extra covers that are based upon the sum insured limit (some companies will offer up to 20% of the buildings cover for accommodation costs, and these are not adjusted based upon the actual rebuild cost). And it's not always about paying them too much, sometimes it can be about not covering them at all.

[unclebulgaria67]

There are situations where people are advised to over-insure. It is not unknown for houses to have been built on land, where if there was a total loss, the house could not be rebuilt on the same plot. Having paid for increased cover, this helps the policyholder, when it comes to Insurers settling the claim.

 

Apart from this, I can't see too many people wanting to deliberately over-insure, so they can get more cover within their policies for alternative accommodation. I would think there are more people that under-insure their properties, as they don't know the rebuilding costs or the cover is based on original survey plus RICS annual increments, without taking into account any upgrades they have added.

 

Over-insurance would be much more of a problem for Contents Insurance.

[JonCris]

There are situations where people are advised to over-insure. It is not unknown for houses to have been built on land, where if there was a total loss, the house could not be rebuilt on the same plot. Having paid for increased cover, this helps the policyholder, when it comes to Insurers settling the claim.

 

Apart from this, I can't see too many people wanting to deliberately over-insure, so they can get more cover within their policies for alternative accommodation. I would think there are more people that under-insure their properties, as they don't know the rebuilding costs or the cover is based on original survey plus RICS annual increments, without taking into account any upgrades they have added.

 

Over-insurance would be much more of a problem for Contents Insurance.

 

Overinsuring building costs serves no purpose whatsoever & is a complete waste of money as the ACTUAL building costs will only be met Contents are another matter also any high value item MUST be specified (usually supported by a receipt) before cover will be given & if it ain't it won't be paid