Insurer wants final settlement before repair

Do you have a legal question arising from how the earthquakes have affected you? Lane Neave partner Dr DUNCAN WEBB has agreed to be an "agony uncle" on how the law applies to certain situations.

Our house is to be repaired and we are scheduled to start soon. The insurer says that before they will start the process we must sign a building contract and release form, and pay them over our EQC money. Is this right?

The insurer's obligation under the insurance contract is to reinstate the home by repair, replacement or payment of cash.

Whatever method of settlement an insurer chooses, they invariably require that the homeowner signs off that the settlement is accepted as full and final. Where there is also a builder involved, they also frequently want the homeowner to be a party to the building contract.

Nowhere in the insurance policy does it say that either of these are required.

The reason for an insurer wanting you to sign a settlement agreement is clear - it wants to be sure that the claim is finally settled and it can close its file.

In particular, it does not want you to come back in a year or two and say that you have found more damage, or that the repair was not adequate.

Insurers often want homeowners to sign building contracts as well and this is for a number of reasons.

First, to create a direct relationship between the homeowner and builder - so that if the work is defective, the homeowner looks to the builder and not the insurer (and this is not a bad thing).

Second, to make it clear what work the insurer is liable for and to push the cost of any extra work on to the homeowner.

Third, to set out some rules for how the repair work will progress and ensure that the insurer is given full freedom to change how the repair progresses.

This all makes perfect sense from the point of the insurer but there are some real pitfalls for the homeowner.

If you are signing a settlement agreement, you are in effect agreeing that the basis upon which the insurer is settling your claim is acceptable to you and meets their obligations.

If the settlement is expressed as full and final (as it will be), then it will be very difficult indeed to revisit it if later it turns out mistakes were made.

In the absence of some dishonesty by the insurer (or perhaps gross error in breach of good faith), it will be binding .

If there are matters which might cause difficulty in the future (such as foundation costs), you may wish to negotiate some carve- outs. Most insurers are reasonable and if this is consistent with the policy terms, they will agree.

Many building contracts have the builder, the insurer and the homeowner as parties - and sometimes the contracts are not consistent with the homeowner's entitlements under the policy.

Things to watch out for are clauses where the insurer seeks to cap the cost of the build, or reserve the right to change the methods or materials used.

These are not rights that the insurer has. The insurer's obligations are defined by the policy terms and are usually to reinstate whatever it costs, using equivalent materials and methods currently available.

The insurer is entitled to the payment from EQC in respect of the house - that is in essence the first level of insurance and should be spent first.

However, there is no real reason for the insurer to receive it until it starts incurring costs.

One difficulty here is that insurers have considerable negotiating power - especially when the prospect of settlement is dangled in front of the homeowner.

There are numerous instances where insurers make demands in settlement agreements or building contracts which they are not entitled to under the policy terms.

Often the insurer will agree to change the most objectionable clauses. However, if the insurer insists on the contract terms, the options for homeowners are limited - they can object and the insurer will simply (albeit wrongly) refuse to progress the repair, or they can agree (perhaps under protest) and get on with life.

It may be that in such a case it could be shown that the homeowner entered into the contract under duress (and therefore the contract could not be enforced by the insurer) but the threshold for duress is high.

Duncan Webb is a partner at Lane Neave lawyers. Email questions for him to

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