How to Avoid the 8 Most Costly Mistakes When Accepting an Insurance Cash Pay-out Offer by James Mitchell

How to Avoid the

8 Most Costly Mistakes When Accepting an

Insurance Cash Pay-out Offer

Aaron Dalton (MNZIQS) & Lester Bryant Asset Sure Quantity Surveyors Ltd 96E Disraeli St, Sydenham, Christchurch Tel: (03) 281 7703 Website: www.asqs.co.nz Email: info@asqs.co.nz

Foreword Thousands of Christchurch home owners are now confronted with the “good” news from many insurance companies that they will receive a cash pay-out for their earthquake damaged houses rather than a repair, reinstatement or a complete re-build. For some home owners, this is great news. At last some money is promised for damage that was done over four years ago. For others it is stressful and deeply concerning that they may not get all that is due and fair. The real question in most people’s minds is, “am I getting enough?” And be particularly wary of the wording “full and final.”

Some people are wondering if their offer will only get them half a house. For those who are confronted with a cash pay-out offer, we have prepared this special report written in simple terms that highlights some of the key issues that arise when deciding what is fair and reasonable and within the terms of the policy. The contrast in this report is to recognise what are 8 costly mistakes that are so easy to make when you are motivated to take the money and get out of the bind you have been in for the last four years. We have prepared this special report for you to know what steps to take to ensure that the cash pay-out offer you have been given provides you with everything you are entitled to under your policy, but more importantly, it provides you with the cash you will need to repair, reinstate or rebuild your house.

We have identified 8 costly mistakes that are so easy to make. And with our experience, we can show you how to totally avoid or at least mitigate the outcome of making these mistakes. The author of this report is an independent Quantity Surveying company headed up by Aaron Dalton, a highly experienced and practical Quantity Surveyor (they call him the home owner’s and builder’s best friend when it comes to insurance claims) and member of the New Zealand Institute of Quantity Surveyors. Yours faithfully

Lester Bryant Managing Director Asset Sure Quantity Surveyors Ltd

What Do We Want to Achieve With This Report? We want to show you how to create The Defendable Position so that your claim and the cash pay-out you are entitled to can be fully justified. Throughout this report, we regularly refer to creating The Defendable Position. This is not a glib term any more than the infamous Beyond Reasonable Doubt statement is. Above all else, if you are to avoid the 8 most costly mistakes when accepting a cash offer from your insurance company, then you need to present back to your insurance company, such irrefutable and rock solid logic that your position is totally defendable and from that position, you leave the insurance company with few, if any options. If there is any sense of scepticism let me say that you are not attempting to get more from the insurance company than is written into your policy. You are not looking to profit from this exercise. You are simplify attempting to secure your full entitlement. You may be with a great insurance company. You may be with a lousy one. Or you may be with Southern Response which is not an insurance company at all but a legal entity set up by the government to administer the distribution of insurance and reinsurance reserves plus government funds (our taxes) from the fallout of AMI. Regardless of who your insurer is, before accepting any cash pay-out offer, you need to be 100% sure the offer is fair and reasonable. And the only way is to follow the recommendations in this report and build The Defendable Position so that you can present to your insurance company the logic and facts that are so hard to defend against.

How to Avoid the 8 Most Costly Mistakes When Accepting an Insurance Cash Pay-Out Offer Aaron Dalton & Lester Bryant ÂŠ 2015

Is There a Statute of Limitations Period? If you have an unsettled claim you may be wise to start pursuing your own personal course of action to forming/forcing a settlement. The right to pursue your claim has certain limitations. Time affects every earthquake related contract, including insurance contracts, tort, and any other legal issue arising in the aftermath of the disaster. The Limitation Act 1950 and the Limitation Act 2010 cast an ominous shadow over claimants of unresolved earthquake issues that occurred at least five years ago. There are two Limitation Acts in place that have timeframe implications on your ability to pursue a settlement. The purpose of the two Acts is to encourage claimants to make claims for monetary or other relief without undue delay by providing defendants with defences to stale claims. The 1950 and 2010 Limitations Acts are going to be operating side by side for up to fifteen years which is 2025. The general 6-year period for most claims remains the same for both Acts. The limitation for a non-monetary and non-declaratory relief is six years after the date of the act or omission on which the claim is based. The legislative intent of both the Limitation Act 1950 and Limitation Act 2010 is to prevent historic claims arising in the courts. The unproven risk is that the Insurers may chose to use it is a defence to a money claim if the defendant proves that the date on which the claim is filed is at least six years after the date of the act or omission on which the claim is based. The problem we have is that this is only an apparent risk. So until the September 2016 is reached we have no idea of what the insurers position may be. With this in mind we believe that anyone who has not been made a substantially correct offer should initiate their own professionals immediately. The actions of the professionals can take months to achieve and forms the reason behind the immediate call to action.

How to Avoid the 8 Most Costly Mistakes When Accepting an Insurance Cash Pay-Out Offer Aaron Dalton & Lester Bryant ÂŠ 2015

Mistake

Not knowing exactly what you are entitled to claim for under the terms and conditions of your policy.

Take the time to sit down and carefully read the terms and conditions embedded in your policy. There are dozens of insurance policies on the market (one estimate came to over 100) but the majority will fall within the handful of big players in the home insurance field leading up to the September 2010 and February 2011 earthquakes. When describing what they will pay out for, insurance policies use key statements such as to repair or rebuild to an as new condition, like-for-like, reinstatement or whatever. Most insurance companies provide a laymanâ&#x20AC;&#x2122;s wording version of what is covered and what is not covered. Get a copy of your policy wording as it applies to your property as at the time of the damage. Study it carefully. It should not be too hard to follow. However, be aware of accidental or deliberate statements that are ambiguous.

How to Avoid the 8 Most Costly Mistakes When Accepting an Insurance Cash Pay-Out Offer Aaron Dalton & Lester Bryant ÂŠ 2015

For example, the AMI Premier policy states that pre-approved surveyors fees are covered. However, in one case we know of, Southern Response who administer the claims made to AMI, stated to a policy holder that this applied only to land surveyors and not quantity surveyors. When Southern Response were challenged on this point, their only defence was that was what was intended, yet nowhere was the term “surveyor” defined to include or exclude any type of surveyor. Unless you are astute and objective at reading insurance policies, we suggest you get an expert to help you through. There are now many policy experts in Christchurch so finding someone with a good track record to help will not be hard. Many legal firms now have policy experts available at short notice and will offer this service at quite a low cost. This will certainly be the case if your policy is from one of the mainstream insurance companies.

Mistake

Not fully understanding the exact extent of the damage to your property.

In most circumstances, your insurance company will have carried out an inspection of your property. This inspection may have been conducted by a well-qualified builder, a Quantity Surveyor, an Insurance Assessor or simply someone contracted by the insurance company to fill some or all of these roles. Keep in mind that a scope could be the collection of facts pertaining to what was damaged. Or it could be a record of what work should be done. A record of damage is not the same as a proposition of work that needs to be done. Assessing the true nature and extent of earthquake damage is not a job for those who do not have a wealth of practical and technical experience. This city is awash with incompetent and superficial assessments carried out by those incapable of accurately assessing which is admittedly, a very difficult task. Put simply, if the Scope (as it is called) has any deficiencies, then it is practically impossible for the scope to be accurately costed. If it can’t be accurately costed, any cash offer made by the insurance company is more in hope that it won’t be questioned or challenged, that you’ll take the money, say a big thank you and go away. To fully understand how to get your own Scope of Works or how to challenge any pay out offered by the insurance company, read Mistake No. 3 that follows.

How to Avoid the 8 Most Costly Mistakes When Accepting an Insurance Cash Pay-Out Offer Aaron Dalton & Lester Bryant ÂŠ 2015

Mistake

Relying on the Scope of Works provided by your insurance company as the last word on how their cash offer was calculated.

When a cash offer is made, ask to see all documentation that leads to how the cash offer was calculated. These are the documents you should be provided with. If not, then read further to see the remedy. Be aware that pure quantities are not enough. Wastage quantities and rounded order quantities (you cannot order half a pallet of bricks) should be used in assessing the true quantities involved. All documents should be dated and not be older than six months unless an adjustment has been made to account for building inflation and other cost changes that can easily occur in a 6 month period or greater. Also bear in mind that any builder you engage may not be able to start for another 6â&#x20AC;&#x201C;12 months. Who will bear the cost of price inflation during this waiting period? It should of course

1. Scope of Damage

be the insurance company who have kept you waiting until now anyway. Once you have received all the insurance company documentation, you should then engage either a Certified Quantity Surveyor (QS)

2. Scope of Works

or a Licenced Building Practitioner (LBP). Better still engage a Certified Quantity Surveyor who is also a LBP. If you engage a LBP, insist that he also engage the services of a QS as builders are practical construction

3. Repair Methodology

experts. When it comes to pricing a new house they may have experience but few builders would claim to have the construction costs analysis skills required to mount a true analysis of your property.

How to Avoid the 8 Most Costly Mistakes When Accepting an Insurance Cash Pay-Out Offer Aaron Dalton & Lester Bryant ÂŠ 2015

Be aware that any builder who is uncertain will load his estimate with price disclaimers. They are called PC Sums and Tags. So although the price they come up with may at first glance look attractive, the risk is upon you and this can be a very large risk. To build The Defendable Position and lay responsibility back on your insurance company, you need both the practical working knowledge of a reputable builder and the analytical skills of a QS. The natural position to take is for the Quantity Surveyor to lead the builder to the all-important price. Once you have engaged a QS and a LBP, instruct them to carry out a full assessment, Scope of Works, Repair Methodology and Bill of Quantities for the repair or reinstatement of your house. The issue here is that there will be a cost for professional fees. But when

4. Bill of Materials

you’re dealing with hundreds of thousands of dollars, this may well be the best investment you make towards creating The Defendable Position. By way of example, we have

5. Bill of Labour

just

completed

yet

another

analysis. The difference between our thorough and professional assessment and the insurer’s was nearly $800,000. If the homeowners had not sought our

6. Bill of Quantities, and 5 combined

advice they would never had a house back anywhere near what they had before.

Mistake

Not instructing a lawyer to review and advise on all the offer documents given to you by your insurance company.

These documents will be a Settlement Agreement along with a Statutory Statement. Lawyers cost money. However, if you choose a lawyer who is an earthquake specialist, his or her expertise will earn their fee many times over. Don’t be afraid to ask for a fee quote or at least an estimate so that you don’t receive any surprise invoices. Over the last three or four years, many lawyers in Christchurch have built up a wealth of earthquake claim knowledge. This expertise is generally cost effective to tap into because the experienced lawyers don’t have to do the homework and research they used to. They can give good advice on most policies and can review offer documents without running up thousands of dollars in fees. Sure, there are many very tricky cases that are not easy to settle and no doubt some legal fees will be horrendous, but for a lawyer to review an insurance cash pay-out offer is relatively straightforward. But do ask for a fee estimate first. Hopefully yours will be one of the simpler ones but the advice will be priceless. Also bear in mind that despite you having reached The Defendable Position, your insurance company may still need to feel the weight and legal thrust of a lawyer so choose your lawyer with this in mind. Hopefully the quality of documentation you provide to your insurance company will not need any extra legal heft to have them consider your claim.

How to Avoid the 8 Most Costly Mistakes When Accepting an Insurance Cash Pay-Out Offer Aaron Dalton & Lester Bryant ÂŠ 2015

Mistake

Not engaging the services of a qualified Quantity Surveyor and a Licenced Building Practitioner to carry out your own Scope of Works.

Throughout this document, we have referred to the need to create The Defendable Position. You cannot create the Defendable Position without facts and figures that come from credible and experienced tradesmen and professionals. You need to do your homework. Choosing the right Quantity Surveyor is not easy. Unfortunately there is no national body or statute that restricts the use of the term Quantity Surveyor. Before you select your Quantity Surveyor, ask for their credentials and practical “in the field real world” experience. In any protracted negotiation that has the risk of ending up in court, the credentials and pedigree of the people involved is critical. Testimony from less than expert people does not work. Choosing a diploma level Quantity Surveyor, or a QBE (qualified by experience) Quantity Surveyor may leave you exposed as their expertise can be easily challenged. And some tertiary qualified Quantity Surveyor may have good technical “sit at the desk skills” but be quickly out of their depth when on site and trying to de-construct and then re-construct earthquake damaged properties. The last person you would engage is one with all the technical skills but no practical skills.

Keep thinking through to the purpose of the engagement—to have a qualified and respected person on your team to help convince your insurance company that the facts you are presenting are irrefutable. Choosing the right builder to work with your Quantity Surveyor is also vitally important. As in every trade and profession, there are the best, the OK ones and then the rest. Naturally you must have a Licenced Building Practitioner rather than just a “good builder.” Again you’re looking for credibility in the eyes of the insurance company. Choose a builder who is familiar with your type of house and its location. If your house is on the hills, do not choose a builder who works mainly on the flat. He may be a jolly good builder, but hillside houses have many trips and traps that flat land builders get caught out on. There is no need to take this risk. If you have a heritage house, choose a builder that loves your type of house. If you have a house that is architecturally designed, go with a builder that is used to working with architects and who enjoys the challenge and has high standards. Once you have chosen the ideal Quantity Surveyor and Licenced Building Practitioner, get them together. If you haven’t chosen one yet, then choose the Quantity Surveyor first so that he can ensure the process runs efficiently. Give them all of your current information and a thorough brief. Ask them to work together and come back to you with a joint proposal about how they will go about providing you with everything you need to receive the cash pay-out that meets the terms of your policy—and of course will return your house to a minimum of pre-quake condition.

Mistake

Not knowing the standard to which your chosen Quantity Surveyor and Licenced Building Practitioner must prepare their scope of works and costings to.

This is getting repetitive, but needs repeating. Everything you do is to get you to The Defendable Position. When engaging the services of a Quantity Surveyor the letter of engagement should reference to the New Zealand Standard NZS 4202 “Method of Building Work”. In court this is the benchmark everything will be argued from. Critical point to note: These are widely recognised areas requiring analysis and reflect the real cost of construction and not just the cost of a building or repair. Quantities are to nearest whole unit (usually assumed to be orderable quantities, not actual quantities). Rather than labouring the point about best use of methodology we will abbreviate this section by saying that these are widely recognised areas requiring cost analysis and reflect the real cost of construction and not just the cost of a building.

Who can price in accordance with NZS 4202? In assembling a case capable of creating The Defendable Position, the following information should be taken into account. NZS 4202 is a standard of method. It does not require a particular qualification for its usage although Quantity Surveyors as a profession are most versed with it. New Zealand has a great shortage of Quantity Surveyors and therefore in general, an inability to assess every property using that profession alone. A lot of practicing quantity surveyors in New Zealand are doing so with little or no qualifications in the discipline itself. In essence they are qualified by experience. The real test is can they deliver to the standard required to defend the position you need to take? There is no governing body or statute denying them the right to claim their status of Quantity Surveyor. Tertiary qualified Quantity Surveyors tend to fill roles outside of the residential market and may have little experience in assessing residential housing. It is the writer’s opinion that at some point in time a legal argument and precedent may arise from this point. It is also the writer’s opinion that a QBE stand point would likely succeed. A qualified but inexperienced Quantity Surveyor could have his opinions easily dismembered by a more experienced panel. In assembling the information on a property that is subject to a cash pay-out settlement, we should consider who uses NZS 4202 methods.

Mistake

#6 (contâ&#x20AC;&#x2122;d)

Not knowing the standard to which your chosen Quantity Surveyor and Licenced Building Practitioner must prepare their scope of works and costings to.

Most Quantity Surveyors price using parts of NZS 4202. Most builderâ&#x20AC;&#x2122;s merchants supply material quotes in accordance with NZS 4202. Most builders and their sub-contractors unknowingly price in accordance with NZS 4202 or large parts of it. To bring this practice into the arena of cash pay-out policies and into creation of The Defendable Position, we believe that four parts are required: 1. A field survey to establish the facts and the surrounding conditions of the property. The person in charge should have relevant construction experience and be able to comment on the insitu conditions that affect the property 2. From the facts gathered in the field and other records a professional take-off should be conducted to establish the best possible Bill of Quantities. Keep in mind that not everything is visible or provable at that point in time. At least one member from the field survey team should be in attendance for the assembly of the Bill of Quantities 3. To counter any omissions or errors in process a peer review by a senior Quantity Surveyor should be conducted over every completed Bill of Quantities. This may include a comparative analysis with similar properties. 4. Visual and digital records relating to the process conducted and the property in question should be kept to mitigate potential claims of mis-information. The use of modern digital systems can bring this service into a realistic price range for most property owners. Surveys that are conducted with little detail and that are not in line with the above practice should be discouraged as they will struggle to support your position.

How to Avoid the 8 Most Costly Mistakes When Accepting an Insurance Cash Pay-Out Offer Aaron Dalton & Lester Bryant ÂŠ 2015

Mistake

Not involving your property stakeholders such as your partner (matrimonial or relationship), trustee (if owned by a family trust) and the mortgagee (bank or other lender).

The house stakeholders have a vested financial interest or relationship interest in the outcome of you receiving and acting on any cash pay-out offer. The decision to accept or reject the insurance companyâ&#x20AC;&#x2122;s offer may not be yours alone. You must engage all who have an interest or security over the property.

Donâ&#x20AC;&#x2122;t be forced into accepting half of your entitlement. On receipt of your cash pay-out offer from your insurance company, you are obliged to share it with all stakeholders. By way of scrutiny the stakeholders expect that their interest in the property is preserved. If repair short-cuts are necessary because of insufficient funds, the outcome will not be favourable. Should the house be taken to market sometime in the future, expect due diligence to be insisted on by the purchaser on any house damaged and then repaired. An inability to prove that a comprehensive job was done will most likely be followed by a discounted offer. Or worse still, the house may become very difficult to sell. A comprehensive and fully recorded repair will achieve an enhanced sale price. This once again proves the value of creating The Defendable Position. Our recommendation is that you call a meeting and have all stakeholders review the offer and then decide what funds should be allocated to test the value of the offer. This will go back to talking to Quantity Surveyors and Licenced Building Practitioners and getting fee estimates so you can present a good indication of costs to the stakeholders.

How to Avoid the 8 Most Costly Mistakes When Accepting an Insurance Cash Pay-Out Offer Aaron Dalton & Lester Bryant ÂŠ 2015

Mistake

Believing everything your insurer tells you can be a mistake. Below is an example of the types of recommendations insurance companies have tried to get their clients to believe.

Southern Response V Avonside Holdings Southern Response had lost three court cases with regards to the allowance of 10% professional fees and 10% contingency sum. These cases set two precedents for what constituted a fair offer: • with respect to were these real costs (and not notional costs) and • what would be a fair consideration in respect to these costs. A sum of 10% for each was established. Following these judgements, one insurer decided to amend their cash pay-out offers to try to recoup the professional fees costs. See below for a real example; (Note: personal details removed).

Customer Cash Settlement Summary Customer Claim Number Address Date Cash Settlement (incl GST) House Total

387,505.85

Less Incurred House Costs

6,164.30

Sub Total

381,341.55

Professional Fees - 10%

38,134.16

Less Incurred Professional Fees

27,636.80

Sub Total

391,838.91

Contingency

39,183.89

Total

431,022.80

Less EQC Cover

152,167.14

278,855.65

Payment to Customer

This raises a question, ‘should the insurer lead the client to believe that $27,636.80 is an expense that the client should incur and have it deducted from the offer?’ Here is why this offer is unjustifiable: 1. The Avonside decision is the notional costs likely to be incurred by the assured on a rebuild, not the insurer; 2. The insurers cost is contrary to the indemnity principle, i.e. to compensate the assured for the loss actually suffered, not for the assured to compensate the insurer; 3. The insurers cost is contrary to the terms of the policy—“we will pay... professional fees including...”. Not that the assured will pay! 4. In simple contract law, one party cannot charge fees if the work was not authorised or outside the range reasonably expected by the other party, e.g. a mechanic finding something wrong with your car during a routine service check and proceeding with expensive repair work without first consulting with the owner; 5. Another way of looking at it is that if the insurer has incurred those fees, it is evidence of the cost to the assured to be included in the contingencies, not to be deducted. The above opinions were shared with us by a very good lawyer that we are happy to recommend to our clients.

Summary With the advent of cash pay-out offers in both the Commercial and Residential markets, the risk of not achieving insurance entitlement is significant. The onus is now on the property owner, and its stakeholders, to take the initiative and satisfy themselves that the insurance offer is fair and reasonable. There are now so many reported incidences where the insurance offer has fallen well short of the real cost of repairing, reinstatement or re-building, that no one should take at face value the insurance company’s offer. Special Note to Trustees: Trustees—and professional trustees in particular—have a high duty of care and responsibility to ensure that the cash pay-out will return the house to what is covered under the terms of the insurance policy. Although the trustees may be the legal owners of the house, they may one day be challenged by the beneficiaries if the house is not repaired to the correct standard and hence loses value or has a lower value because of the lack of diligence on the part of the trustees. The authors of this report trust that you have just read some helpful tips for homeowners receiving cash settlement offers. If you wish to engage Asset Sure Quantity Surveyors to help assess the true value of your insurance company’s offer, in the first instance contact: Lester Bryant Managing Director Asset Sure Quantity Surveyors Ltd 96 Disraeli Street Sydenham, Christchurch Office: 03 281 7703 Mobile: 021 774 477 Email: lester.bryant@asqs.co.nz

About the Author Aaron Dalton (MNZIQS) • Bachelor of Construction in Quantity Surveying & Construction Management • Certificate of Due Completion of Apprenticeship in Carpentry • National Certificate in Advanced Carpentry • National Certificate in Construction Health & Safety • Member of NZIQS • Registered Quantity Surveyor • Licenced Building Practitioner - Carpentry & Site Being a Registered Quantity Surveyor is no simple task. The years of discipline and recognition required makes Aaron one of your best advocates, especially if you ever needed to go to court. Aaron is the lead Quantity Surveyor at Asset Sure Quantity Surveyors and manages the quantity surveying team. Aaron has 29 years experience within the construction industry. He started his career as a builder’s labourer and progressed into a Carpentry Apprenticeship where he worked on top line residential and light commercial projects, to become a Tradesman. With interest in Cost Control and Project Management, he spent four years studying Quantity Surveying and Project Management. Once graduated, he continued a professional carrier in Quantity Surveying and Project Management on high end residential and commercial projects. His experience as a Quantity Surveyor and Project Manager makes him fully aware of the time and cost it takes in administration, design, planning, preparation, health and safety and dealing with local authorities, all of which will see you out of pocket or a stalled project if it is not allowed for. He has also completed projects under SCC1, NZS 3910, NZS 3915 as both the Head Contractor and as client-side representative. Aaron is familiar with the objectives of these contract types and the pitfalls to look out for. Aaron Dalton (MNZIQS) Reg. Quantity Surveyor Project Manager aaron.dalton@asqs.co.nz

Prepared, Copyrighted and Published by ASSET SURE QUANTITY SURVEYORS LIMITED