Are fire property insurance options still relevant amid current events?

July 25, 2022

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By Arno de Jong, MCL expert, Netherlands

Settling building damage poses challenges, especially during increasingly restrictive situations.

As building and construction regulations continue to develop, customers and other parties in the market should consider how the insured sum of buildings in property insurance policies and the maximum of hedging clauses are established.

Policy intentions

The idea when drawing up a fire policy has of course been that if one is affected by an unforeseen covered structural damage, the payment would be sufficient to restore the building to its original state. This is an ideal thought and in line with the principle of indemnity. However, in practice, we see examples of insured persons who are confronted with building regulations, having to spend extra costs to pay for the full recovery. The difficult truth is: if you do not comply with these building regulations, you simply do not receive a building permit/environmental permit — leaving policyholders with no option but to cover the additional expenses.

The building policy provides for this through a cover clause known as “additional costs at the behest of the government”. This is a creative and suitable solution for insured persons who do not have to bear possible extra costs themselves. Without this solution, for example, an insured person would have to increase the mortgage. However, the hedging clause often has a maximum in the form of a fixed amount or a percentage of the sum insured. The hedging clause is therefore no guarantee and for insured persons there is always the risk that part of the repair costs must be borne by themselves.

Price developments

The increase in construction costs, especially in the last year, are impacted by the high demand for raw materials and the resulting scarcity. Material price increases of 80% in a year’s time are no exception. You would think that if material prices rose sharply, this will only have a limited effect on the reconstruction costs because it also includes the labour component. That seems like a fair conclusion because material prices may only be 40% part of the construction costs; the other 60% consists of labour.

Now, however, we are confronted with another development in the construction industry: more and more people are working with freelancers. Large and small contractors hire craftsmen to carry out work for them. In recent years, the overall demand has increased to such an extent that every self-employed person can choose which jobs he takes on. The increase in the hourly rates of freelancers is much higher than that of the permanent staff of a contractor. In the overall construction process, we are not only suffering from rapidly rising material prices but also, albeit to a slightly lesser extent, from the rapid increase in hourly rates of freelance workers.

In a market in which prices rise sharply, excesses also arise. We regularly see situations where an insured person, after some searching, has found a contractor who is willing to make a quotation. If we then judge the quotation as excessive and address the contractor, the reaction is often that “it’s non-negotiable”. A reasonable conversation to reduce the amount of the quotation to normal proportions is therefore not possible in some cases. As a result, policyholders are at the mercy of the vagaries of the market. In these cases, loss adjusters at Sedgwick can lend a helping hand to put the insured in touch with a reliable recovery partner at an acceptable cost.

Another important aspect in a market with rising prices is the moment of commissioning. Especially with complex building damage, it is inevitable that there is a long period between the occurrence of the damage and the assignment to a contractor to carry out the repair. Think of the period of cause investigation, asbestos problems, inventory of the damage, construction research, securing inventory etc. We know enough examples that only six months after the damage the assignment can be given to the contractor. Nowadays, an entrant will anticipate upcoming price increases, as a result of which the average price level in the assignment is 8% or 9% higher than the price level on the date of damage. However, the latter is the basis for our damage assessment because we determine the damage on the basis of the value before and the value after the damage date.

Changing building regulations

Did you know that new legislation has been added to the Bouwbesluit as of 1 February 2022? This new legislation may have far-reaching consequences for our industry. Anyone who is going to build new, or must have a major structural damage repaired, is obliged to apply for an environmental permit (originally called a building permit). The moment of submitting the permit application determines the requirements that must be met. An application submitted today must comply with the regulations in the building decree as it applies today. Keep in mind that the building decree, of which the current basic version dates from 2012, is regularly supplemented or amended. Every addition or adjustment means that the construction costs will increase further.

Sustainability clause

For approximately ten years, we have found a sustainability clause in a number of policies. In general, this clause gives an insured the opportunity to make additional investments that are intended to save the environment. We often see a maximum of 10% of the repair costs mentioned for this. For loss adjusters, this is a difficult component because it is not related to damage. This clause gives the insured the opportunity to make additional expenses, but whether and to what extent one will make use of it cannot be estimated in advance. This clause sometimes raises the question of whether we should take this into account when issuing a reservation advice.

Building regulations have been tightened considerably, especially in the field of energy-saving facilities; an insured person will soon be obliged to comply with far-reaching measures to save energy. The additional costs that this entails will then belong under the clause “Additional requirements by order of the government”. You may wonder whether the sustainability clause adds much.

Recommendations moving forward

We continue to see a rapid increase in cases where insured persons can no longer be fully compensated. Sharp price increases and new legislation increasingly result in a substantial difference between the repair costs and the sum insured. Even the annual indices used to adjust the amount of insured sums (whether or not appraised) do not appear to be able to keep up with the price increase at the moment. Insured persons who have been able to obtain a policy with a guarantee against underinsurance appear to be the best off, but that is only a small part of the total. It is expected that the maximum of the “Extra costs at the behest of the government” will be reached more often, while on the other hand, a sustainability clause will be used less frequently. We encourage market parties to develop policy-technical solutions so it better resonates with the current events.

For more information, contact [email protected].

This content was originally published in Schade Magazine.

Tags: building, building regulations, Damage, Insureds, Legislation, Netherlands, Property, Property damage, Property loss, regulation, sustainability, View on property