case studies - exceeding the sum insured

04/16

household – sum insured – inflation-linking causing policyholder to be over-insured – whether policyholder entitled to premium refund.

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Mrs G and her aunt had, for many years, held household buildings and contents insurance for their two-bedroom terraced house in Wales. The policy was inflation-linked and premiums increased by 15% annually. Mrs G did not query the sums insured until 1999, when her daughter began managing her affairs. The annual premium had increased by then to £1,674.91. The contents were insured for £141,488 and the buildings sum insured was £212,042. The correct amounts should have been £40,000 and £55,000 respectively.

The insurer accepted that the values for both buildings and contents were far too high and it offered a rebate of £1,000 and a further year’s cover without charge.

complaint upheld
Although it was the policyholder’s responsibility to assess the replacement cost, the consequence in this case of the firm’s applying an automatic annual increase was an insured value which was totally unjustified. If the policyholder submitted a total loss claim, the sums insured would have had no bearing on the insurer’s liability.

We considered a fair result would be achieved if the insurer refunded 50% of the premiums paid over the previous five years, with interest, and it agreed to do this.

04/17

household contents – minimum security requirements – policyholder noting requirements before start of insurance – whether policyholder entitled to compensation for distress and inconvenience. maladministration – distress and inconvenience – whether cancellation of policy by policyholder justified compensation.

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Mr C telephoned the insurer on 12 June to ask about household insurance. He wanted the cover to start on 1 July. When he received the policy documents, he was dismayed to learn that cover depended on his complying with a minimum security condition. He protested, saying no one had mentioned this when he enquired about the policy, and he cancelled the policy on 21 June. The insurer returned his premium in full but rejected his demand for a payment of £3,000 as compensation for the inconvenience he said the insurer had caused him.

complaint rejected
The insurer recorded most calls made to its call centres and we were able to listen to tape recordings of Mr C’s conversations with the insurer’s staff. On several occasions, matters of security had been discussed at considerable length. We were therefore surprised that Mr C alleged he had not been told of the insurer’s requirements. He had not been put to any unnecessary inconvenience and we agreed that the insurer was fully justified in refusing to pay compensation.

04/18

household buildings – sum insured – reinstatement – whether insurer entitled to limit cost of reinstatement to sum insured.

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Following a serious fire at Mrs Y’s house in March 1999, the insurer appointed loss adjusters to assess the damage. They considered that repairs would not exceed the sum insured of £110,000. They also calculated that the sum insured was too low and that the cost of rebuilding would be £135,000. Mrs Y increased the sum insured to the amount they recommended.

The insurer paid over £7,000 for emergency works to make the property safe, but there was bad weather in April and further damage occurred. When tenders for the repairs came in, however, the lowest was for £139,250. The insurer agreed to reinstate the property, but it limited repair works to a total of £103,000 – the sum insured less the cost of emergency work. This was sufficient to rebuild the property, but left the first floor a shell.

Mrs Y said she had been promised that if she increased the sum insured to the amount the loss adjusters recommended, the insurer would meet the claim in full and would make no deduction for under-insurance.

complaint upheld
The policy gave the insurer the option of making a cash settlement, repairing, replacing or reinstating. The insurer had clearly opted to reinstate and was therefore bound to replace as new, with no deduction for wear and tear or depreciation. The cost was accordingly not limited to the sum insured.

If the insurer wished to impose a ceiling of £110,000 on its liability, it had to communicate that to the policyholder. It had not done this until after the house had been demolished and it could not impose the limit in the middle of agreed works. We required the insurer to meet the full cost of reinstatement.

04/19

maladministration – confidentiality – insurer disclosing information in breach of policyholder’s instructions – whether compensation payable.

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Mr D insured his house and garage with one insurer, while the business property, which he stored in the garage, was insured by a different insurer. When he made a claim under the business property policy, the loss adjusters appointed by that insurer wrote to Mr D’s household insurer, seeking information. The household insurer responded, confirming that it insured the house and garage, giving the policy number, and stating that no claim had been received.

Mr D was extremely aggrieved to learn that his household insurer had provided information to the loss adjusters, asserting that this was in breach both of his specific instructions and the Data Protection Act. He demanded £60,000 compensation for damage to his stock. The household insurer accepted that it should not have released information to the loss adjusters. It offered Mr D £100 in recognition of the distress and inconvenience it had caused.

complaint rejected
There was no link between the household insurer’s unauthorised disclosure of information to the loss adjusters and any loss by Mr D. No evidence had appeared which indicated that the disclosure had influenced the loss adjusters’ handling of the business insurance claim. In the circumstances, we were satisfied that the insurer’s offer was appropriate and we stated that we would not require it to increase its offer or to contribute to Mr D’s alleged losses.

04/20

household – sum insured

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Mr J insured his house for an index-linked sum – £285,000 – when he renewed the insurance in 1993. In February 1995, he discovered landslip damage to his tennis court. He appointed an engineer and notified the insurer. It became apparent almost immediately that the damage was progressing rapidly and, in March 1995, the insurer agreed to pay for emergency work to stabilise the site.

This work did not halt the slippage and a meeting was held in June 1995 to discuss possible remedies. Mr J asked the insurer to settle his claim by declaring the property a total loss and paying the full sum insured. However, the insurer’s loss adjusters were of the opinion that the insurer’s liability was limited to underwriting the cost of remedial work up to the sum insured.

Work continued, becoming more complicated as time went on, until eventually the site was stabilised. The insurer informed Mr J that the sum insured had been exhausted. He complained, asserting that the insurer had elected in June 1995 to reinstate the property instead of making a cash settlement, and that it was therefore bound to meet the balance of the full cost of repairing his house. This was estimated at £145,000.

complaint upheld
Cases of catastrophe such as this are fortunately very rare. The sum insured had been correctly calculated and was sufficient to cover the rebuilding and associated fees, as stipulated in the policy. However, it was not sufficient to cover the additional cost of stabilising the site. Although insurers are generally aware there is a theoretical possibility of rebuilding costs exceeding an adequate sum insured, the insurer in this case had not advised Mr J of this possibility.

The insurer had never agreed to reinstate the property regardless of cost. However, we did not accept it was appropriate for it to limit its settlement of this claim to the sum insured. The insurer had been closely involved in approving repairs and, once they had begun, both the insurer and the policyholder had effectively been committed to their completion. It was reasonable for Mr J to believe his property would be fully reinstated and he could not be said to have been indemnified if he was left with a badly cracked house on a stable site.

More generally, Mr J was not in a position to assess the likelihood of such rare combinations of events when he decided on the sum insured. The sum insured was generally accepted to be appropriate and we concluded that, in such cases, the sum insured should not act as an absolute cap on the insurer’s liability. We therefore required the insurer to pay £100,000 towards Mr J’s repair costs. We also recommended the insurer to meet the balance of his costs, although we had no jurisdiction to make a binding award for any amount in excess of £100,000.