Insurance not always common sense

22:21, Apr 07 2014

Our insurance company came up with the plan to repair our badly damaged TC3 home last month. The builder's quote for the repair is higher than the GV and the cost for buying a new home. What do you think our options will be? If we take a cash payment, how much difference can we expect? What are the expected complications of the cash payout?

This is a really good question and shows that insurance and common sense do not always run together. The basic approach in insurance law is that you are to be "reinstated". That is to say you are to be put back in the position you were prior to the loss - but generally not better off.

There are some exceptions to this. If your house is badly damaged and can't be repaired then a new house will be built for you and this clearly leaves you better off in one sense (especially if you had an old house because your new house will be built to modern standards).

However, this presumes that you want a house to live in (or rent etc). Many policies also have other options (such as buying another house or building on a new site) which also affect actual reinstatement of the home.

If your only interest is the financial value of the house you might want simply to have the money. To "reinstate" you to the same financial position that you were in prior to the loss by payment in cash, the insurer need only pay you the value of the house prior to the loss.

This is often referred to as the indemnity value and most insurance policies have a clause which states that if your house is a total loss and you want a cash payment rather than a rebuild then you are entitled to the indemnity value (sometimes also referred to as the market value).


This is invariably less than the replacement cost, and sometimes a lot less.

In your case it seems that you are not a total loss so you do not have an automatic right under your policy to get the cash rather than the actual repairs.

In that case most policies give the insurer two options; either to repair the house, or to pay you the cost of the repairs. I have said before that the cost of the repairs should be the actual cost and not just an estimate.

However, in your case, for perfectly sensible reasons, you may not want to repair the house so those costs would not be incurred. So in strictly legal terms you are caught in a nasty situation where it is silly to spend all that money repairing an old house, but the insurer is not obliged to give you the freedom to buy or build a better (if perhaps smaller or less well appointed) new house.

In fact this is a situation where a decent and reasonable insurer will be happy to discuss with you the best option. While the starting place is usually that the insurer will undertake the repairs, in your case it should be readily apparent that this is not a good use of funds.

I would expect the insurer would be happy to discuss paying you the cash equivalent of the cost of repairs knowing that you will use the funds not to reinstate by repair, but by building or buying another house. Be aware that if you do this the insurer is likely to look carefully at the figures. For example if you were to buy another house you would not incur any accommodation expenses and possibly the building contingency in the repair contract would be looked at as unnecessary.

You will also need to consider what will happen with the existing house. Sometimes it will be liveable (but uninsurable). If it is badly damaged you may have to demolish it.

Because you will be negotiating a settlement which is outside the strict policy terms, all of these matters are open for negotiation. While your insurer must deal with you in good faith, they are entitled to seek to pay no more than they are obliged to, so be prepared for tough and perhaps frustrating talks. It is also likely that if the insurer pays you in cash before you actually buy or build another house they will want you to provide a statutory declaration that it is in fact your intention to do this. This is so they can be sure that you are not just taking the money and running (in which case you would be entitled to the indemnity/market value of your house only). If they are paying more than the market value they are entitled to require you to use the money on repairs or a replacement house.

Your case is only one of many examples where the best solution and most efficient use of money (and housing stock) is not achieved by the strict terms of the insurance policy. Negotiating with the insurer for the best result is to be encouraged.

Do you have a legal question arising from how the earthquakes have affected you? Lane Neave partner Dr DUNCAN WEBB is our "agony uncle" on how the law applies to certain situations. Email questions for him to

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