Building costs inflation — Part one: challenging times for property damage insurers

Weightmans’ property damage team provides advice and representation to insurers in relation to a full range of property damage claims, including those involving fires, floods, building collapse and subsidence. Our team provides advice on policy coverage, subrogated recoveries and the defence of claims made by third parties.  

We have seen first-hand the impact of building costs inflation. We are here to help steer our clients through the challenges which may arise during these challenging times.

Policy coverage advice

• There has been an increase in cases of underinsurance since the effects of building costs inflation started to really kick in. Declared Valuations are fast becoming inaccurate. In some cases, the sums insured are grossly inadequate to meet the reinstatement cost of the claim.
• We are able to advise insurers in relation to the operation of their policies in these circumstances and steer them through the process of applying an ‘average’ clause; or the application of any other remedy provided for by the policy.
• More often than not, the policy wording leaves little room for doubt, but that is not always the case. Like any contract, an insurance policy can sometimes be interpreted in a number of ways. Based on the rule of contra proferentem, any doubt will be interpreted in favour of the policyholder.
• Delays in reinstatement caused by long lead-in times and a lack of labour can also give rise to other policy coverage concerns. For example, in relation to the adequacy of cover for business interruption and alternative accommodation.
• Not only will this serve to increase the cost of those elements of the claim, there is also the potential for disputes to arise in relation to the exhaustion of indemnity periods and generally surrounding the quantum of the claim.
• In a similar vein, there is the potential for complaints arising from any of the above issues to be made by a policyholder.
• For example, in relation to the application of average to consumer insurance, the Financial Ombudsman Service has indicated that it will usually find that it was not reasonable for insurers to apply an average clause if the insurer did not specifically ask the customer to give an estimate of the full amount at risk and did not explain that this information was required from the outset.

Advice

It is worth instructing a lawyer at an early stage of the handling of a claim, where there is the potential for any of the above issues to arise. An early steer on the likely application of the policy terms and conditions and an initial overview of any potential problems which may arise at a later stage could prove cost-effective in the long run, potentially avoiding the escalation of a costly dispute with a policyholder.

Subrogated recoveries

It is widely reported that the rise in building costs has led to property damage and business interruption claims being settled at a higher level of quantum across the board.

When we are presenting the quantum of a claim in a subrogated recovery action against a third party, we must ensure that we will be able to satisfy the judge that the losses are recoverable as a matter of law and that the policyholder took steps to mitigate its loss.

This feeds into our analysis of the level of any settlement offer we may wish to make or accept in relation to the claim.  

This could prove challenging in circumstances whereby the claim has been settled by insurers a considerable period of time after the incident occurred.

The general rule in relation to the assessment of damages is that they will be assessed as at the date of the breach. The court may take into account subsequent events, but it is important to note that this is not the default position.

Advice

Evidence of tenders, the reason for delays, difficulties in sourcing materials and labour should be meticulously documented. Insurers will, more than ever, need to pay close attention to reported price indices and ensure that all aspects of the claim can be fully substantiated and documented.

It is often a good idea to engage a lawyer at an early stage of a claim where there is potential for a subrogated recovery against a third party. The lawyer can work with the loss adjuster to guide them in relation to how best to preserve insurers’ position as regards the recoverability of the quantum of the claim. This is all the more relevant in the current climate.

A keen eye should be kept on expert quantum evidence, for example that which has been obtained from a quantity surveyor. It is not advisable to rely on the figures presented by an expert at an early stage of a claim without asking them to keep those figures under review, in line with inflation.

Further, the inflation of building costs has caused an increased risk of insolvency. A close eye should be kept on the insolvency status of any defendant party so as to ensure the availability of assets to meet the payment of a claim.

The defence of third party property damage claims

When we are defending claims the ‘shoe is on the other foot’, so to speak. The issues we have set out above in relation to subrogated recoveries become factors which we may wish to raise to contest the quantum of the claim being presented by the claimant.

For example, we are currently dealing with a claim arising from a substantial fire at a property in 2019.

The claim is firmly contested on all fronts. The claimant contends that insurers should pay for the full cost of rebuilding the property and, (notwithstanding that they have a full defence in relation to liability), insurers’ position, based on expert evidence is that the appropriate measure of damages is the cost of repair of the damaged part of the property.

The claimant has recently presented a revised quantum schedule which is significantly higher than the original claim.

This type of scenario is becoming quite commonplace and poses insurers with a unique challenge in relation to the settlement of third party claims. It is also relevant to ensuring that insurers’ claim reserves are set at an accurate level.

Advice

A more pragmatic approach may need to be taken in relation to the early settlement of claims where possible; particularly in cases where a litigation risk has been identified at an early stage. Expert evidence in relation to quantum should, in any event, be kept under close review and updated on a relatively regular basis. Lawyers can also assist by keeping all matters relevant to the adequacy of the claim reserve under close review and ensuring that the claim reserve is set at an appropriate level.

Fraud

Unfortunately, the current climate has seen an increase in fraudulent property insurance claims, both consumer and commercial.

Weightmans’ Head of Fraud, Mike Brown, has direct experience of this issue, having worked at the Direct Line Group for a number of years, as Head of Counter Fraud Intelligence. He recalls numerous examples of exaggerated claims and fraudulent claims during recent times.  

Amongst other things, he has seen building merchants capitalising on the widely recognised inflation in building costs by issuing false invoices, double invoicing and generally exaggerating the cost of materials for financial gain.

Advice

Insurers should ensure that they have rigorous checks and balances in place and undertake thorough due diligence in relation to the costs presented by materials suppliers and contractors. Weightmans’ in-house specialists can provide a deep dig into any third party and carry out a comprehensive due-diligence report in conjunction with the property damage team’s handling of a matter.