Insurance Helpline with Cedric Stephens

Question: I had a mortgage with a building society. It started during 1982-83. The building was insured with a company owned by the building society. The house was hit by Hurricane Ivan.

The roof was damaged. I filled in a claim form and gave the adjusters access to the premises. About 12 months later, they visited the premises. They took photographs and said the house was underinsured. Average would be applied.

The estimate of repair was improperly done. It amounted to about $3 million. An offer of settlement of $124,000 was made. I contacted the building society. They said that I should speak with the insurer. I made many attempts to do so, but failed. After more than a year I accepted the offer.

I learned later that the settlement was used to pay off the mortgage. The title is still with the lawyers or the building society. I will have to pay $30,000 for its release. The claims money was to repair the house. I know very little about insurance and don't understand what happened. Can you please explain?

- ndayes2002@yahoo.com

Answer: Your question has many sides. I will list and then discuss the issues one by one. They include (in no particular order): non-insurance, mortgages and insurance, deductibles (or excesses) for losses caused by hurricane, earthquake and flood, the average clause and underinsurance.

In reviewing these topics, I will also share information that your insurers provided about the claim. Finally, I will also suggest a few things that you can do to prevent a repeat of the experience.

PROBABLY NOT INSURED

Your house is probably not insured at the present time. Hurricane Ivan occurred in 2004. The claim was settled, according to insurers, in February 2005. Since the proceeds were used to repay the mortgage, it is unlikely that the building society would have continued to insure it after that. They have no more interest in the building. The risks are now all yours. Pay the lawyers to get the title. Obtain a loan to repair the house. Insure it. If you can't find all the money, finance the premiums over nine or 10 months.

If you were to follow this advice, you would not end up like the groom who, according to this newspaper, lost his $15 million business. It 'done bun down' and there was no insurance.

MORTGAGE CONTRACT

Many persons who enter into agreements with lenders to buy houses don't do any homework. They know very little about the terms of the mortgage agreements they sign insurance contracts and the link between the two.

A mortgage is a legal contract. In it, the lender is not entitled to the possession of the property. That right resides with the borrower. Provided that the borrower repays his/her debt as required under the agreement, that right remains.

The premises - building and land - are used as security for the loan.

Insurance is very important for the lender. This is especially during the early stages of the loan if the security for the loan suffers damage. Mortgage agreements always have clauses which deal with insurance. Building societies grant hundreds of home loans each year. The houses must be insured.

Some lenders set up their own insurers. This way, they keep premiums that borrowers pay 'in the family'. This approach also gives lenders more control over their risks. With their business practices, terms of contracts and in-house insurers, lenders decide what happens to monies paid for insurance claims.

WHEN DEDUCTIBLES APPLY

Claims for losses from hurricane, earthquake and flood are subject to deductibles.

The deductibles amount to 2.0 per cent of the sum insured. This applies to most local policies that include those perils.

The sum insured for your house, according to your insurer, was $6,845,000. As a result, your deductible - the portion of the loss you were required to pay - was $136,900. This amount was deducted from your adjusted claim of $366,126.37 (not the $3 million you stated).

SUM INSURED TOO LOW

The sum insured for your house, $6.845 million, represented 68.5 per cent of its replacement cost. Rebuilding costs were estimated at $9 million in 2004.

Insurers gave no details about how that figure was calculated. However, as a result, the adjusted claim was reduced by 31.5 per cent - the amount of underinsurance ($6,845,000/$9,000,000).

This was done because the sum insured was less than the replacement costs. When the sum insured is lower, the average clause is applied. The insurance company told me: "Before renewal each year, the lender informs the mortgagors of the current sum insured, and the proposed sum insured for the renewal period. It further explains average and the possible consequences and points out that the responsibility for the correct sum insured being applied is the mortgagor's. Upon receipt of any advice to increase/decrease the sum insured, the lender notifies the insurer and the appropriate adjustments are made."

I hope that you have a much better understanding of what happened nearly four years ago and, more important, will take steps to prevent a recurrence of that situation.

Cedric E. Stephens provides independent information and advice about risk and insurance. For free information or counsel, email Mr. Stephens: aegis@cwjamaica.com.