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Like-for-like vs like-for-right

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Insurers have been at the vanguard of calls to “build back better” after Australia’s record-breaking floods catastrophe – and rightly so.

If we build back the same way, in the same places, then we can expect the same devastating results.

The message is getting though, and at recent Insurance Council of Australia (ICA) forums, flood victims who want to stay put have expressed a desire to improve the resilience of their homes as they rebuild, and they want their insurers to help.

But there’s a problem. Insurers are contractually obliged to build back like-for-like – the principle is written into policies.

And while insurers may agree that additional resilience measures make sense, for the most part, they aren’t going to pay for them.

That’s called betterment, and it’s something insurance traditionally stops well short of, for obvious reasons. It’s hard to price, and even if it could be included, it would send already expensive premiums soaring well beyond where they are now.

If a customer can rebuild in a different way for the same cost, then that may be possible, but this works best for total losses, which most flood claims aren’t.

Setting a sum insured high enough to cover the cost of resilience improvements doesn’t work either. Insurers don’t automatically go up to the sum insured because over-insured properties create clear “moral hazard” risks.

A cash settlement could be explored, with the insured adding extra funds to cover the cost of improvements, but there are very good reasons why an insurer rebuild suits many claimants better, especially in the current environment.

So can anything be done? ICA says the industry is looking at the issue, and that policies may need to evolve.

The major insurers say that while they primarily build back like-for-like, they are flexible enough to include resilience improvements where possible, and Suncorp’s Build it Back Better scheme offers an additional $10,000 for insureds to increase resilience in certain circumstances.

ICA COO Kylie Macfarlane tells this issue is “top of mind” for many in Australia.

“There are a lot of people who are looking at ‘how do we actually build back better in our current location’, and that’s for those individuals to make decisions around that,” she said.

“Insurers need to comply with the terms of their contract, which are typically like-for-like.

“We have a lot of people talking to us through northern NSW and southeast Queensland saying ‘we don’t want to leave our community, but we need to raise our house’.

“And that is a different outcome to building back what they’ve got today. In that instance, they need to engage with their insurer to have a conversation about what their policy terms specify, and what options they have available.

“For many people, if that is what they want to do, the option may be that they take a cash settlement and undertake that work independently.”

But Ms Macfarlane says insurers do need to think innovatively about future products that could provide “a different array of options”.

“Is there the opportunity to think about different terms of contract that may allow customers to engage their policy terms in a way that allows them to remediate or rebuild their property outside of the traditional like-for-like terms?”

Suncorp says that, “as is standard in the industry”, its policies are designed and priced to build back like-for-like or provide customers with a cash settlement for the necessary repairs.

“If a Suncorp Insurance customer elects for us to build back like-for-like, the Build it Back Better resilience options are offered on top of this obligation, up to policy limits,” a spokesperson says.

“We are committed to working with builders and suppliers to determine what upgrades could be done to better protect the homeowners next time they are significantly impacted, particularly by extreme weather.”

IAG also says it is dedicated to helping customers become more resilient.

“Generally, the repair or rebuild of a customer’s property will be in line with their sum insured, restoring it to its condition prior to their claim. However, we also look for opportunities to increase the resilience at a customer’s property during the claims process,” Executive Manager Peril and Event Claims Craig Byfield said.

“Following Cyclone Seroja, we looked to improve the cyclone resilience of our customers’ homes by identifying opportunities to upgrade the property to a higher building standard, where possible. For example, this included installing shutters on windows to help prevent wind and water damage to the home in the future.

“And following the recent flood disaster in southeast Queensland and NSW, we looked for opportunities for customers to repair their homes to a more resilient level to help protect them in the future.

“For customers whose homes needed to be rebuilt, this included the potential redesign of their home within their sum insured, that would make it more resilient to flooding, for example, by elevating the floor level of the home.”

Chief Corporate Affairs Officer at Allianz Australia Nicholas Scofield says many claimants are keen to “build back better”, with some only realising they are in a flood-prone area following the recent catastrophe.

However, he says that the most common proposed solution is to raise entire properties off the ground, and this is a complex and expensive process. He also says as most flood-damaged properties are not total losses, it is harder to make such dramatic structural improvements.

“You’d have to essentially rebuild the whole property, and it wouldn’t be an option for insurers to cover that for a partial loss if the cost would exceed that of reinstating the property to its original state”, he said.

Mr Scofield says some policies provide an uplift on the sum insured in the case of a total loss, and this approach could theoretically be extended to partial losses in order to provide additional funds for simpler resilience upgrades to be installed.

But LMI Group Founder and Chairman Allan Manning believes policy wordings won’t change a great deal.

He says coverage is available if additional resilience measures are dictated by a council or similar authority, and there is a set of clear rules, but otherwise it’s very hard to price in the improvements.

“Who sets out what has to be done? I just can’t see it happening. The insurance industry has never covered betterment and the insured has to take some responsibility themselves.

“You couldn’t have a situation where a council approves development on a floodplain, the homes get wiped out and it’s the insurer that has to pay to upgrade them.”

Insurers are determined to do all they can to help communities build back better, but there’s understandably a limit to how much they are prepared to pay to fix the past mistakes of others.