Insurance Helpline with cedric Stephens

Question: I insured my house in 2007 for a second time. The sum insured was $7.7 million. This was in order to get a bank loan. National Housing Trust (NHT) also insured it under a mortgage for $4,355,800.

Hurricane Dean damaged the house. I claimed under the two policies. The adjusters assessed the loss. The repair estimate of $378,475 was prepared by my husband.

The claim was settled for $147,359. NHT's insurers paid $49,628.26. The other lenders paid $87,730.74.

What is the purpose of having two policies on the same property when the settlement cannot pay for the damage? Did both insurers have to collaborate?

NHT refused to increase the insurance as the bank loan was not used for building purposes. How can I end up paying one premium so that in case of damage I make only one claim?

- audreywallen_hanson@yahoo.com

Answer: Insurers are not the 'bad guys' - at least not in this case. Blame the bank.

Like all loans, this one came tied with strings. Insurance was one.

Neither the bank, nor the NHT for that matter, appears to have told you about the fine print in the insurance policies. Your claim was discounted by nearly 64 per cent because you were unfamiliar with the details of the coverage. As a result, you and your husband had to find nearly $250,000 to repair the house. That amount is two per cent of the house value. Can this explain why both lenders gave it little or no attention when each loan was being closed?

HOME EQUITY LOANS

You got a home equity loan from the bank. Equity is the difference between the home's fair market value and the unpaid balance on the mortgage.

Equity increases as the mortgage is paid or as the value of the property rises.

In this type of deal, the borrower uses the equity in the home as collateral. These types of loans are all the rage now.

They are used to help finance major home repairs, medical bills, college education and other types of expenses.

They create a lien against the borrower's house and are also called second mortgages. Just like the traditional (or first) mortgage, they are secured against the value of the property.

The second insurance contract - like the first one - mainly protects the lender. As stated in an earlier article, insurance is very important to all lenders. This is especially so during the early stages of a loan. At that time the lender's risks are at their highest. Insurance helps to reduce those risks in the event of loss or damage.

INSURERS COLLABORATE

Insurers normally work together in the event of claims when the same property is insured under two or more policies. Collaboration takes place under rules known as the contribution clause. It is found in all types of property policies.

The rules say when two or more policies apply to the same loss, each policy pays its part of the loss, unless its terms provide otherwise. The aim is to ensure that the claimant does not collect more than 100 per cent from two or more insurers. For example, assume that there are two policies. Each insures a risk for $100,000. When there is a $50,000 loss, each policy will pay $25,000. In your case, NHT's insurer's share of $12,055,800 was about 36 per cent. They paid a similar share of the claim. The bank's insurers paid 64 per cent.

Your claim was not paid in full because the two insurance contracts do not offer full coverage for losses from hurricanes, earthquakes and floods.

All insurers in Jamaica — as in other Caribbean islands and North America — give only partial coverage. Partial coverage in our case amounts to 98 per cent. In other words, when a loss occurs, insurers and the lenders expect that the insured, the borrower, will fund the two per cent which is called an excess or deductible. Your excess amounted to $241,116.

People in the local insurance industry have a legal duty to explain the average clause to buyers of insurance. This is what section 120 of the Insurance Act 2001 says. The aim is quite simple: give consumers information to protect themselves.

The excess clause can also cause nasty surprises to borrowers. Shouldn't the bank regulator take a leaf out of the Insurance Act or, are they just too busy trying to keep tabs on other things, like managing the exchange rate or FX trading?

I take my hat off to your husband. He got the correct answers for both sets of sums. The insured value for policy No. 2 was not under-estimated.

As a result, the average clause did not come into play. From my experience the clause is applied 99 per cent of the time. If it had, you would have received less money from the insurers. His repair estimate was also accurate. 'Big him up' on my behalf.

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