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Sums insured

The FOS has considered a number of cases where the sum insured under a household buildings or contents policy has proved to be inadequate. It concludes that assessing the precise value at risk can be problematic for policyholders. This is particularly true of buildings insurance. The appropriate sum insured is based on the rebuilding cost – but unless there has been a recent survey this may be difficult to determine (ON4).

Only a small number of cases have been reported by the FOS in this category, but four principles can be tentatively identified:

  • If the sum insured is clearly inadequate, the insurer is entitled to make an appropriate reduction in any claims payment.
  • If a policyholder has made a full and honest attempt to value household contents, the FOS will take a sympathetic approach.
  • If a policyholder is over-insured due to the application of automatic index linking of the sums insured, the insurer may be required to refund the excess premiums paid.
  • If an insurer opts to reinstate a damaged building, without condition, it cannot later restrict its outlay to the sum insured.

Sums insured

It is common for household policies – particularly those issued in respect of inner city properties – to contain requirements as to the minimum level of security. For example, a common stipulation is that every external door must be fitted with a five-lever mortise deadlock meeting British Standard 3621. Such a requirement may be in the form of a warranty, breach of which causes cover to cease from the time of the breach.

The FOS requires three conditions to be met if an insurer is to refuse to meet a claim on the basis that a security requirement has been breached (Ombudsman News 4 ):

  • The requirement must have been brought to the attention of the policyholder before the policy came into force. It is not sufficient that the requirement is detailed in the policy documentation, nor is it sufficient that it forms the basis of a question on the proposal form.
  • The insurer must be able to demonstrate that it only agreed to issue the policy because the policyholder claimed to have met the security requirement.
  • The failure to meet the security requirement must be relevant to any loss that has occurred. For example, a security requirement might oblige a policyholder to have window locks in use whenever the property is unoccupied. If the policyholder forgot to secure the window locks when leaving the property, there would clearly be a breach of the requirement. However, if burglars entered the property by breaking down a door the breach would clearly be irrelevant to the loss.

Burst or leaking pipes

Household policies typically cover damage caused by the escape of water if a pipe bursts or leaks. However, some expense may be incurred in locating and exposing the site of the problem – so-called "trace and access" charges – and in repairing the pipe. In a case study in Ombudsman News 58 the FOS indicates that it will not ask insurers to meet these costs as part of a claim for escape of water and does not regard such restrictions as onerous:

This restriction on the scope of the cover was neither unusual nor significant. So it was not something the insurer needed to have highlighted in its policy summary given to customers at the point of sale.

Other issues relating to burst or leaking pipes are addressed below under the heading “Unoccupied” properties.

Floods

What is a “flood”?

Rohan Investments Ltd v Cunningham (1999) the Court of Appeal had to consider what constituted a “flood” for the purposes of a household policy. It decided that a flood could originate from an accumulation of water that was not large in absolute terms. In doing so it moved away from its decision in Young v Sun Alliance (1976) where it had held that a flood was “something large, sudden and temporary, not naturally there, such as a river overflowing its banks”.

The FOS has indicated that it will now apply the test in Rohan in preference to that in Young on the basis that it is closer to the ordinary expectations of householders (Ombudsman News 10 ). It is interesting to note that this revised approach required a fresh judicial decision: the FOS did not feel able to bring about the change through the use of its “fair and reasonable” approach.

In Ombudsman News 73 the FOS gives details of a case involving the collapse of a retaining garden wall following a short period of exceptionally heavy rain. It was accepted that there had been no flooding in the area. However, the FOS concluded that a rapid build-up of water behind a retaining wall could in itself amount to a flood.

Availability of flood cover

Under DISP rule 3.3.1(11) the FOS may dismiss a complaint if it is about the legitimate exercise of the firm's commercial judgment. Consequently the FOS will not generally consider complaints about an insurer's refusal to offer cover.

In recent years many households have been affected by severe flooding. In 2002 the ABI issued a Statement of Principles on the Provision of Flooding Insurance, effective from 1 January 2003, which explained the circumstances in which its members will make flood cover available. This has led the FOS to state (in ON24 ) the following exception to its general rule:

Compliance with the ABI statement would seem to represent good insurance practice and, in any disputed decision to decline to renew flood cover, we would need to be satisfied that an insurer had fully complied with the statement. So firms should note that we will look into complaints referred to us about the availability of flood cover. A firm that fails to comply with the commitments in the ABI statement is unlikely to be making an appropriate use of its commercial judgment.

An updated Statement of Principles on the Provision of Flood Insurance was issued by the ABI in November 2005 and became effective on 1 January 2006. A further update followed in 2008.

Subsidence

The FOS recognises that claims for subsidence can be technically challenging and may take time to resolve. In particular, an insurer may need to monitor the pattern of subsidence and rate of movement. However, unless this process has been properly explained to the policyholder, concerns may develop as to what appears to be unwarranted delay in settling the claim. A large percentage of the subsidence disputes referred to the FOS include a complaint about perceived delays. The FOS therefore stresses the need to maintain good communications with policyholders.

In Ombudsman News 59 the FOS highlights three common issues in subsidence disputes:

  • What is “subsidence”? The FOS takes the view that unless the term “subsidence” is defined within the policy, it covers any damage caused by “downwards movement of soil”. This would include the type of settlement caused by the compression of soil under the weight of a recently constructed building, unless settlement is expressly excluded under the policy terms.
  • What should happen when part of the damage occurred before the inception of the policy? Subsidence movement and resulting damage may be progressive, occurring over a number of years. The FOS accepts that strictly an insurer is liable only for damage which occurred after the inception of its policy. However, in some cases it will be impossible to distinguish between the damage occurring before inception and the damage which occurred once the policy was in force. The FOS may in such cases ask the insurer to pay for the repair of all the damage and the full costs of stabilisation.
  • What should happen when more than one insurer is involved? Complications can arise if a policyholder has changed insurers at a time when – perhaps unknown to the policyholder – subsidence movement and damage was already occurring. In such cases the FOS relies on the ABI Domestic Subsidence Claim Handling Agreement in requiring one or other of the insurers to meet the claim in full.

The FOS also comments on the line taken by one insurer which refused to undertake stabilisation work whilst accepting responsibility for any necessary ongoing repairs and redecoration. Expert evidence indicated that without stabilisation, movement and damage would continue. However, the insurer's argument was that its liability under the policy only extended to the cost of repairs and that stabilisation was “preventative, not restorative”. This argument met with little sympathy from the FOS, which asked the insurer to meet the costs of stabilisation:

In our view, the proper repair of a building requires something more long-lasting than a temporary patch-up. Filling cracks and repainting cannot properly be regarded as repairing subsidence damage if, within a relatively short time, those same cracks are likely to reappear.

Finally, the FOS deals with an interesting case where the whole of a semi-detached property was affected by subsidence but the insurer only covered one side. Whilst the insurer was happy to undertake stabilisation work, it believed that this was only viable if the work extended to the foundations of both sides of the property. Unfortunately, the owner of the other side refused to co-operate. The FOS obtained expert opinion that a particular approach to stabilisation would enable just one side of the property to be treated and required the insurer to proceed on this basis even though it involved greater expense.

Rot

Household policies usually exclude cover for damage caused by wet or dry rot. An issue arises when the rot itself results directly from an insured event – such as escape of water. The FOS has identified that in these circumstances some insurers will meet a claim for the rot damage, others will not.

For the time being the FOS will support insurers in rejecting claims where the wording and positioning of the exclusion makes clear the intention to exclude damage by rot whatever the underlying cause. However, the FOS states that it is clearly better for policyholders if such damage is covered and that in the future it may be necessary to consider whether such an approach is called for as a matter of good insurance practice (Ombudsman News 10 ).

Outdated construction standards

In Ombudsman News 73 the FOS states that:

insurance cannot be offered on the basis that old structures must conform to more recent building standards.

The case in question involved a retaining wall that was built over 140 years ago and had no weep holes. However the principle is clearly capable of wider application.

Preventative action

In some cases a policyholder may cause damage when attempting to prevent loss. The FOS gives the example of a policyholder who called out a plumber when a pipe in his kitchen blocked (Ombudsman News 10 ). To avoid the damage which would otherwise have been caused to kitchen cupboards, the plumber broke open the pipe and diverted the water. When the policyholder claimed for the plumber's charges of £70.50 the insurer rejected the claim on the basis that the breakage of the pipe had not been caused by an insured peril.

The FOS pointed out that the plumber's actions were a direct and necessary consequence of the escape of water and were consistent with the policyholder's duty to take all reasonable steps to prevent loss. It indicated that in such cases it would ask the insurer to deal with the claim if two conditions were satisfied:

  • The policyholder had acted reasonably and in order to prevent damage which was covered under the policy.
  • The damage the policyholder was seeking to prevent would cost significantly more than the damage deliberately caused.

Cover for construction materials

In Ombudsman News 73 the FOS considers the question of whether construction materials are covered under a household contents policy. A policyholder, Mr T, claimed for a large quantity of copper, brass, lead and aluminium which had been stolen from his back garden. Mr T stated that the lead was required to repair the front porch of his property and that he intended to make garden furniture out of the other metals. In rejecting the claim, the insurer argued that the policy covered neither scrap metal nor construction materials.

The FOS concluded that construction materials were covered under the policy. It accepted that the lead fell into this category and required the insurer to meet that part of the claim. As far as the other metals were found the FOS expressed some doubt as to their intended use and so supported the insurer’s decision.

Motor vehicles

Motor vehicles other than gardening equipment are typically excluded from the cover provided by household contents policies. Occasionally questions arise as to whether certain items can properly be regarded as motor vehicles for this purpose.

In ON73 the FOS reports a case in which the policyholder, Mr W, claimed for a minimoto – a small motorcycle - which had been stolen from his garage. The insurer had rejected the claim, relying on the following policy exclusion: " Motor vehicles, electrically, mechanically or power-assisted vehicles (other than domestic gardening equipment)". Mr W argued that the minimoto was owned by his young son and was a child’s toy. It had a low top speed, could not be used on roads and motorcycle insurance was not available for it.

The FOS ruled that the minimoto was not a toy and rejected Mr W’s complaint. It seems the FOS was influenced by two factors– no adult could effectively supervise a child using the minimoto and the minimoto was considerably faster than other powered toys used by children in a domestic environment. The decision leaves open the question of whether powered toys such as mini-cars and go-karts will be caught by such exclusions.

Matching sets

The FOS has frequently had to consider cases where damage has occurred to one part of a matching set and a precise replacement is not possible. For example, where one chair of a three-piece suite has been damaged the original fabric might no longer be available. As a general rule, the FOS has followed the practice of the IOB, which asked the insurer to pay the cost of the damaged item plus 50% of the cost of replacing the undamaged items.

However, the FOS has indicated in ON10 that it may deviate from this practice in two situations:

  • It is possible that no award will be made in respect of undamaged items where the loss of match has no substantial impact. For example, where just a few tiles in a tiled bathroom need replacing, it is possible that no award will be made in respect of the undamaged tiles.
  • Conversely, where matching is intrinsic to the value of the items, the FOS may make an award for the full replacement costs of both the damaged and the undamaged items. For example, an insurer was asked to replace a full set of kitchen cupboards when all but one had been damaged by an escape of water (ON58 ).

Method of settlement

Most household policies are now issued on a new-for-old basis. A policy will normally give the insurer the right to choose whether to settle a claim by repair, replacement, reinstatement or cash settlement. The FOS has indicated that this right must be exercised reasonably. It has made the following points.

Repair

Where insurers opt to repair, they should explain the implications of the choices made by either party. In particular, if the repairer is chosen by the insurer or its agents, it is the insurer which will be liable to make good any deficiencies in the repair. Conversely, if the policyholder chooses the repairer, it is the policyholder who will normally be responsible for the quality of the work. However, if the insurer exercises control over the repairer chosen by the policyholder – for example, by requiring the use of particular materials – the insurer may again be liable for any deficiencies (ON10 ).

Replacement or cash settlement

Insurers should not insist on replacement if the item involved in the claim cannot be replaced. For example, in the case of antique jewellery, it would not be reasonable to insist that a policyholder buy a modern mass-market replacement. In general, policyholders should be allowed to choose where they purchase a replacement and be offered a cash settlement if a replacement is not available.

No deduction should be made from such a cash settlement in respect of any discount from which the insurer would have benefited if its preferred supplier had been used. Nor will it always be appropriate to issue vouchers rather than a cash settlement.

In some cases a policyholder will prefer a cash settlement for personal reasons. For example, there may have been a change in personal circumstances or the item lost may have had a sentimental value. In such cases the FOS may ask the insurer to make a cash settlement (Ombudsman News 10 ).

Buildings or contents?

In some circumstances it may be important to determine whether a damaged item falls under a buildings or a contents policy. For example:

  • The policies may be underwritten by different insurers.
  • Even if the policies are underwritten by the same insurer the cover may differ. For example, accidental damage cover may be included in the contents policy but excluded from the buildings policy. In the event of an accidental damage claim, the outcome will therefore depend on which policy the loss falls under.

The FOS has outlined in Ombudsman News 30 three principles which it applies in approaching such cases:

  • The basic test is whether an item can reasonably be removed and taken to another home. If it can, then it is normally part of the contents.
  • The FOS will consider any policy definitions and exclusions but is prepared to override these where they would lead to a perverse and unfair result.
  • Careful and fair consideration of each item is required. Otherwise there is a risk that the categorisation applied by an insurer will seem to the policyholder to be an illogical or cynical attempt to avoid paying a legitimate claim. The FOS suggests that there are some difficult cases. For example, most laminate wooden flooring is glued together and fixed under the skirting board or beading. It is difficult to remove intact and is likely to be considered part of the buildings. However, some reusable click-together laminate wooden flooring is marketed as being easily transportable and may well be better regarded as part of the contents.

“Unoccupied” properties

The typical household policy will exclude cover for certain perils such as theft, escape of water and malicious damage when the property is left unoccupied for a specified period of time – usually 30 or 60 days.

Unfortunately there is often no definition within a policy to explain what is meant by “unoccupied”. The FOS points out that a range of definitions exists. For example, in connection with the Occupiers' Liability Act it is possible for a person to “occupy” a property for many years even if it is left empty for all that time (Ombudsman News 34 ).

If a policy does not contain a plain and intelligible definition of “unoccupied” then the FOS will adopt the meaning that is most favourable to the consumer. This may mean that the property will be regarded as “occupied” even if the policyholder was not sleeping there every night – providing that it was visited on a reasonably frequent basis.

Furthermore, even if a property is unoccupied for more than the specified period of 30 or 60 days the FOS may ask the insurer to deal with any claim arising from an event within that period. A good example may be found in ON58 . Mr and Mrs W departed on a three-month cruise early in the new year. On their return in April, they discovered that water pipes had burst in the unheated house, flooding the property and leading to rot in a wooden floor. The insurer declined a claim on the basis that the policy conditions excluded cover for “escape of water” if the insured property had been left unoccupied for 60 or more consecutive days. However, the insurer had established that there had been particularly cold weather conditions in the area in the first 10 days of January. The FOS concluded that this was the time at which the pipes had most probably burst. As it was within the first 60 days, the insurer was instructed to pay the claim. However, it was accepted that the insurer should pay only part of the cost of replacing the wooden floor, since the rot would probably not have occurred if the property had not been unoccupied for so long.
It should be noted that this is a discretionary approach and is unlikely to be exercised in favour of a policyholder who has abandoned a property or left it so neglected that “it practically invites unwelcome attention” (Ombudsman News 34 ).

Caravan insurance

Security requirements

Theft cover under a caravan insurance policy may be subject to specific security requirements. On occasion, these requirements can be surprisingly onerous. The FOS gives in ON4 the example of a policy which required a caravan left unattended for more than 24 hours to be kept:

in a properly fenced and securely locked storage compound with the following minimum requirements: security lighting, mobile security patrols and/or resident caretaker or owner or operator of the storage location whose private dwelling shall be situated immediately adjacent to the sole access point of the compound.

It appears from ON4 that the FOS takes a similar approach to these terms as it does to security requirements under household policies. Three questions therefore need to receive a positive answer before a claim may be rejected:

  • Was the requirement brought to the attention of the policyholder? Unless such requirements have been highlighted before a policy is sold they are unlikely to be enforced by the FOS:

    As a general rule, the more unusual and burdensome the terms of the policy, the greater the insurer's duty to ensure consumers are aware of these terms before they pay for the policy.

  • Can the insurer demonstrate that it only agreed to issue the policy because the policyholder claimed to have met the security requirement?
  • Was the failure to meet the security requirement relevant to any loss that has occurred? For example, the FOS describes a case in which a caravan was stolen from a facility with no security lighting and with a gate that was unlocked. The FOS was not satisfied that there was any link between these factors and the theft of the caravan. No evidence was available as to whether the theft took place at night or in the daytime, nor was it clear whether the gate was open or merely unlocked. The insurer was therefore asked to meet the claim even though the security requirements of the policy had technically been breached.