There is a major danger looming for the building industry – and in turn you the Homeowner
Insurers have started and I predict, will aggressively move in 2014 to cash settle as many claims as possible.
Because of the slowness of Insurers to settle the claim, the frustrated, stressed and impatient customers, many will take these cash settlements without consideration for the escalation allowance between the time of accepting the settlement offer and the time the construction contract being accurately priced and signed, the unseen damage and un-costed foundations coupled with potential hyperinflation in materials and labour as the recovery accelerates through 2014/15.
From the claims I have settled, to date my experience shows that homeowners have no concept of the time involved in the preparation work required to get a house to the “on site builder’s hammer” stage. Most home owners are unaware that an “easy” build (single level 3-4 bedroom up to 200-230 square metres on a level site with easy access takes on average, currently a minimum of six months from a “standing start” (this is when you are advised you are a rebuild, and the amount you have to spend on your new home).
You need to engage an architect/draughtsman to discuss and design concepts, then arrange engineer designed foundations, geotechnical report, and survey, once these reports are received they are then incorporated into working drawings and submitted to Council. For Aurum’s applications in Wellington, permits are received within 15 working days for architecturally designed homes. In Christchurch, Aurum is allowing and working on a 55 day turnaround to obtain a permit.
For you the homeowner there is a major risk for unfunded cost overruns as the repairs or rebuilds (in contradiction with the policy terms and principals of Insurance settlement) are only being scoped to a “notional” claims position rather than to actual cost. Insurers and their PMO’s are making “best guess” allowances for foundations, particularly in TC3, and cost overruns can be $ tens of thousands of dollars out. Recent foundation examples that the KSL Audit / Aurum building system has assisted;
A St Albans TC3 claimant $94,000, a Halswell TC2 claimant $38,000, a TC2 Papanui client $52,000 and a Green Hill, Mount Pleasant client $18,000.
A rebuild offer for a Redcliffs client of $245,000 on completion of all of the plans and settlement (time lapse 9 months) resulted in a rebuild cost of $343,000 and there will be a foundation allowance overrun still to be negotiated.
A St Martin’s TC3 client had a $54,000 additional foundation overrun.
A Papanui rebuild of $386,000 eventually was agreed by the insurer at $482,000 and has only now been settled as the foundations and framing are now in place on this TC3 site and there has been no foundation cost overrun.
A Cashmere client was offered $440,000 and has recently settled for $592,000.
A St Albans Claimant’s repair was costed in 2011 at $320,000 and after KSL requested an escalation update was offered $406,000. Aurum have advised KSL the same repair has been costed at $440,000.
A Parklands resident had been costed as a repair at initially $217,000 then on review increased to $274,000 and the actual builder’s costed repair is $396,000.
If you are intending to self-manage your rebuild (which will allow you to build in whatever style, construction, design or size without betterment) make sure you get professional advice on how and when to settle your claim or you could end up being unnecessarily, financially disadvantaged. None of the Banks are displaying any concerted effort to assist clients who wish to self-manage, so are likely to have little appetite for greater risk and advances through cost overruns.
Even on a fixed price contract the builder is not liable for additional engineering or foundation issues. If the builder takes on a direct customer and there is a foundation cost overrun the builder will not know that a “potential” customer default will occur, until they are at least two thirds of the way through the build.
Whilst the customer may have paid for the cost overrun at the time that the foundations were laid, they may not have sufficient capital to fund the full project, necessitating mortgagee sales, additional finance issues resulting in delays and costs and could financially destabilise the building company.
Ensure you take professional advice from a qualified Insurance Claims Advocate and /or Legal Adviser who understands the building industry at the “micro” (nuts and bolts) level if you are considering a “Cash Settlement” and intend to be a Self- Managed rebuild.
Written by Kevin Seque 43 years insurance industry experience.