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ombudsman news

issue 10

October 2001

repair, replace or cash-

Most household policies now provide "new-for-old" cover but leave it to the insurer (not the policyholder) to decide whether the claim should be settled by repair, replacement, reinstatement or cash settlement. We take the view that the insurer must exercise this power reasonably, in the circumstances of the individual case. This has a number of implications for both parties.

Where insurers opt for repair, we consider they have a duty to explain the implications of any choices made by either party. If the repairer is chosen by the insurer - or its agents (such as loss adjusters) - then it is normally the insurer who will be liable to make good any deficiencies in the repair.

Where a policyholder insists on a particular repairer carrying out the work, then it is the policyholder who will generally be responsible for the quality of the work. This does not mean that every repairer who has provided a claimant with an estimate will be regarded as the claimant's chosen contractor. We have considered complaints where the insurer told the policyholder to obtain estimates and the policyholder sought the loss adjuster's assistance in doing so. In these circumstances, we have concluded that the insurer, rather than the policyholder, was liable for the repairer's shortcomings.

Even if the policyholder chose the repairer entirely independently, the insurer will be responsible for rectifying deficiencies in the work if it or its agents "controlled" the repairer, for example by requiring the repairer to cut his costs or to use certain materials or parts. In those circumstances, the repairer can no longer be regarded as the policyholder's agent.

Opting for "replacement" is only a reasonable option on the insurer's part if the object claimed for can be replaced. If the object is antique jewellery, for example, then it is not open to the insurer to insist the claimant buys a modern replacement from a chain shop. Similar issues arise whenever the replacement options are limited. It may, for example, be unreasonable to limit a policyholder's choice of replacement to a particular retailer.

Policyholders should be allowed to choose where they purchase a replacement and they are entitled to a cash settlement if they cannot find an acceptable alternative. In such circumstances, we would not regard it as reasonable for the insurer to make a deduction from the cash settlement to represent any discount it would have got if the policyholder had bought a replacement from one of the insurer's nominated suppliers. Nor would it necessarily be appropriate for the insurer to offer vouchers to the policyholder. If the option of replacement is not available, then the only way in which the insurer can indemnify a claimant is by a cash settlement.

In some cases, policyholders may not wish to purchase a replacement for the damaged or stolen goods. This may be, for example, because their circumstances have changed, or the object had sentimental value. Where this is the case, we will normally ask the insurer to agree a cash settlement.

case study - repair

10/09
household buildings - repairs - failure to repair properly - policyholder suffering distress and inconvenience - appropriate compensation.

After Dr I's flat was seriously damaged by fire in October 1997, the insurer appointed loss adjusters and builders to handle his claim. Extensive work was necessary, but the flat was expected to be ready for Dr I to move back into by May 1998.

In the event, the work was not carried out to an acceptable standard and a second firm of builders had to be brought in to put matters right.

For the first few months, Dr I lived in rented accommodation but he then moved in with his father. Repairs were finally completed in December 1999. Dr I complained about the insurer's failure to get the work done properly in the first place, and he sought compensation in excess of £309,000. This included £216,000 for 20 months of distress and aggravation; reimbursement of various costs including telephone bills, legal expenses, and mortgage charges; payments for his time spent supervising and reporting on the work; and finally a payment in recognition of his inability to sell the flat while the work was in progress.

complaint upheld in part
The insurer acknowledged that it failed to ensure the original repair work was up to standard, but we were satisfied that it took appropriate steps to remedy the situation. What we had to decide was how much compensation the insurer should pay to reflect the added inconvenience to Dr I, and any expenses he incurred, over and above what he would have had to endure anyway as a result of the fire.

We took the view that whatever had happened, he would still have had to pay his mortgage and other property-related costs. We were not persuaded that he would have sold the flat, had it not been for the problems encountered; nor were we satisfied that he needed to involve solicitors to progress the remedial work. In our opinion, the insurer had already paid Dr I at least £4,000 compensation for alternative accommodation costs while he was living with his father. Taking this into account, we awarded Dr I a total of £3,750 compensation. This comprised £1,000 for the time he spent in overseeing and reporting on the work, £750 for distress and general inconvenience, and £2,000 for loss of use and enjoyment of his flat for the period between the expected and actual completion dates.

Walter Merricks, chief ombudsman

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.