Proposed short article for Irish Broker magazine presenting a synopsis of the dissertation on retentions.
12th June 2012
RETENTIONS – Alan FitzGerald, FCII., FCILA., suggests Insurers are not entitled to withhold money on agreed claims on a general percentage or arbitrary basis.
This issue has troubled Alan FitzGerald who is a Chartered Loss Adjuster who acts on behalf of Insurers and Policyholders. Alan has carried out extensive research into the matter and has prepared a detailed dissertation which can be viewed on his Assessing Website (www.propassess.com). Alan questions the validity of this procedure and here outlines the pertinent points.
Over the past five years some insurance companies in the Republic of Ireland have introduced what I would refer to as “arbitrary” retentions. In simple terms if a settlement is €10,000 Insurers hold back 30%, paying €7,000 now and the balance of €3,000 when the works are done and invoices submitted. It is my view that this is a fundamental error in the understanding and interpretation of how an indemnity is to be calculated and applied. In essence if they are entitled to withhold anything they should apply wear and tear deductions on a scientific basis to calculate the amount retained. The main points are as follows:
• The function of a material damage Policy is to pay a sum of money so the Insured is placed in the same financial position after the loss as he was before.
• The “Reinstatement Memorandum” appears to have been “imported” with its particular provisions applied to Policies in general, including Personal Lines (“unvalued”) Policies.
• The “Reinstatement Memorandum” operates only to “valued” Commercial Policies and in specific circumstances.
• Retentions under Reinstatement Memorandums are always calculated on a “scientific” basis i.e. deductions for wear and tear on a component basis. For example decoration based on its age but ceiling and wall plasterwork nil on the basis that it will not be replaced during the lifetime of the Policyholder etc.
• The retentions now applied can only be described as “arbitrary” on the basis that they average 30% (talks of some Insurers increasing this to 40%!) and amount is not calculated on a “scientific” basis.
• The Policyholder has to be paid for his financial loss and if he is not given sufficient funds, cash deals are inevitably done and invoices cannot be produced which in essence is a “Catch 22” situation which indirectly encourages Policyholders to operate in the “black” economy.
• I believe there may be an argument for retaining VAT although there is still an argument that this is part of the Insured’s financial loss in that VAT is part of the measurement of that loss.
• There should be clear and precise language if Insurers wish to retain part of the legitimate settlement figure.
• Policies in this country are identical in wording to those in the U.K. yet this practice operates in the Republic of Ireland only.
In my dissertation I refer to legal precedent and how depreciation has always been calculated on an accurate or scientific basis. Some Policies in the market refer to paying the full cost of reinstatement as new provided work is done without delay. Clearly a reasonable interpretation of this wording would dictate that Insurers require proof of work being carried out but this does not necessarily mean invoices. In any event it still doesn’t get away from the fact that Insurers have to pay the reinstatement cost less wear and tear deductions or “depreciation” no matter what. Some Policies might refer to the situation where works are not carried out and an example would be to pay the “reduction in market value resulting from the loss or damage but only up to what it would have cost to rebuild or repair if such work had been carried out”. For a partial loss the loss of market value is the cost of repair and again the same principle or approach applies in that the loss should be calculated on a scientific basis i.e. the repair costs less wear and tear deductions on a component or item by item basis.
In my dissertation and the supporting legal notes I give various examples of Policy wordings but I think the fundamental point is clear, in that, in the absence of clear and unambiguous words to the effect that a specific amount will be retained then matters should be approached based on recognised procedure and precedent and, where works are not carried out, a ”traditional indemnity” calculation should be the basis of settlement which in the majority of cases will represent the cost of repairs or reinstatement anyway. If Insurers agree to provide “new for old” cover then they should pay the claim accordingly and only maintain a “retention difference” where the Policy stipulates costs have to be incurred or work done. Again the “difference” should be calculated on a component or item by item basis. For household claims this “difference” in the majority of cases will be nominal or “Nil”.
It would appear to me that some Insurers are now regretting providing cover on a “new for old” basis. In essence the money they are withholding represents an unjust enrichment and whilst there might be some merit in this approach in terms of questionable or fraudulent claims, its application on a widescale basis in my opinion represents a fundamental disregard to the principles of indemnity and its application with the prospect of expensive retrospective action a significant possibility.
Alan FitzGerald, FCII., FCILA., FUEDI-ELAE., is a Chartered Loss Adjuster and expert witness and CPD Lecturer. He operates his own practice dealing with both Insurer and Policyholder instructions. The body of his dissertation can be found at www.propassess.com