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Best Practice: Offering cash settlements to customers after a flood

As an industry, insurers are committed to supporting customers who have been flooded, particularly those who are vulnerable.

It is an insurer’s first priority when a customer is flooded to help them get their lives back on track as quickly and safely as possible by providing emergency payments, alternative accommodation and carrying out appropriate repair work.

Due to the complexity of flood claims, and the potential devastating effect they can have on normal life, an insurer may appoint a loss adjuster to assess the damage and oversee the restoration process. The standard flood claims process often involves a loss adjuster organising the cleaning and stripping out of the customer’s property, appointing a drying company to disinfect and dry out the property and appointing a builder to do the repair and reconstruction work. Insurers, and their network of suppliers, are experts at managing this process and carry out a significant number of successful property repairs every year.

In some instances, rather than using their insurer to repair the property, a customer may prefer to accept a cash settlement and manage the repair process themselves. For example, a customer may wish to use a local builder they have worked with previously. Particularly with vulnerable customers, it is important that insurers provide additional guidance to ensure a customer fully understands the implications of accepting a cash settlement and that the insurer undertakes additional enquiries to assess whether a customer is capable of overseeing the repairs process. Insurers must act in a customer’s best interests and there may be circumstances where a cash settlement may not be appropriate, although it is ultimately a decision for the customer to make.

This best practice guidance is drafted for insurers and applies to building damage claims caused by floods. It can be provided to customers or shared more widely where helpful, although some information may require further explanation.

The purpose of this best practice guidance is not to define who a vulnerable customer is, as this will depend on the particular circumstances of each individual customer. Instead, a combination of factors may be present for these principles to apply, including:

  • The claim involves a vulnerable customer
  • Severe damage to the customer’s property
  • Complex repair works are required
  • The value of the claim is substantial
  • The customer is residing in alternative accommodation.

In most instances cash settlements will be offered to customers at the reinstatement phase, after the insurer has carried out decontaminating, stabilising and drying works. This is because, while building works will be more familiar to customers, drying and decontamination works are carried out by specialists engaged by insurers. For vulnerable customers, an insurer should consider whether offering a cash settlement for the entire project/claim is appropriate in light of the particular circumstances of the claim, including assessing whether a suitably experienced supplier has been engaged to undertake drying works and the best interests of the customer.

ABI members agree to the following best practice principles:

1. Insurers will discuss with their customer how to best communicate with them.

It is important that customers receive insurer communication in a way that they can clearly understand. This may involve giving customers a choice of how best to communicate with them to ensure that customers receive information about any cash settlement process by their preferred method. Where appropriate, additional information, such as examples of how a cash settlement process works, may also assist in helping customers’ understanding.

2. Insurers will satisfy themselves that the cash settlement amount offered is satisfactory in light of the estimated costs to reinstate the property.

This may include:

  • Ensuring that the loss adjuster or surveyor engaged by the insurer has offered a settlement amount that accounts for all the work needed to reinstate the property and the scope of works, provided in a format that the customer can understand, is agreed between the insurer and customer. Where a customer has requested to undertake additional private works during the process of reinstatement, explaining to the customer what works are covered by their policy and what are not.
  • In order for claims to progress in a timely manner, insurers should advise customers who are seeking to obtain their own quote to do this at the right point in the process (e.g. when drying is complete).
  • Using best endeavours to ensure that any quote obtained by a customer planning on using their own contractors, has captured and detailed all the work needed to reinstate the property and that the scope of works includes provision for compliance with any relevant building regulations. If the insurer identifies that the customer’s contractor may not be suitably qualified, based on the information available, the insurer will advise the customer of the importance of using a contractor with the necessary skills and experience.
  • Prior to the acceptance of a cash settlement offer, where the works are sufficiently complex to require a surveyor, insurers will outline to the customer that the cost of obtaining a surveyor may be included within the settlement offer, if this is provided for in the customer’s policy.
  • If the insurer is offering a cash settlement amount that is less than the insurer’s quote, explain to the customer why this is the case (e.g. explaining overhead costs of suppliers on insurer panels or if evidence is required that VAT has been paid before this cost can be reimbursed) and that a fair settlement will be reached, in accordance with the specific policy wording in each case.

3. Insurers will clearly inform customers of the potential implications of accepting a cash settlement.

This may include:

  • Outlining the benefits of using an insurer’s panel to undertake the repair work:
    • Insurers will engage the services of those that meet their criteria and are competent to do the work.
    • Insurers are responsible for ensuring repairs are completed to the appropriate standard and rectifying any works that do not meet this standard. In contrast, a customer is responsible for the quality of repair work undertaken by their chosen supplier and the insurer is not responsible if this repair work is faulty or needs to be redone.
  • Explaining to the customer that if they choose to proceed with a private quote which exceeds the amount their insurer has agreed to pay then the customer would need to fund the difference themselves.  
  • Reminding the customer of their policy obligation to maintain their property in a good state of repair, and that not complying with this requirement may affect their policy cover.
  • If relevant, informing customers, particularly commercial customers, about potential duties under the Construction (Design and Management) Regulations, such as relevant health and safety obligations. Although, for most domestic customers, duties will usually pass to the contractor or surveyor.
  • Providing the customer with a comprehensive list of the anticipated repair works that need to be completed, where that would be of assistance to the customer to allow them to fully understand the works that need to be done within the cash settlement amount agreed.
  • If VAT has been excluded from the cash settlement amount, explaining to the customer what information is needed to have the VAT amount reimbursed by the insurer and the timeframe for receiving this payment.

4. Insurers will undertake necessary checks to assess the capability of a customer to manage the reinstatement process.

This may include:

  • Checking with the customer that they understand the steps involved in engaging a local contractor to undertake the work.
  • Where the customer has engaged a local contractor, if the insurer identifies that the customer’s contractor may not be suitably qualified, based on the information available, the insurer will advise the customer of the importance of using a contractor with the necessary skills and experience.
  • Where the customer has engaged a local contractor, the customer is aware that they should have an agreed payment plan in place with their contractor, prior to starting the works, and that the customer should satisfy themselves that work has been completed before making final payments.
  • Where the work is substantial and/or sufficiently complex to justify a surveyor, the cost of a surveyor will likely be included within the settlement amount, and the customer should be advised of this to encourage the use of a surveyor.
  • If additional support is needed, signposting the customer to relevant support services.

5. Insurers will clearly communicate their role after the cash settlement amount is paid to the customer.

For example, explaining to the customer:

  • What acceptance of the cash settlement means, including outlining the nature of the relationship with the insurer going forward.
  • The process for re-engaging their insurer in the event that unexpected additional damage is discovered during the repair process. The insurer may review whether this should be included within a claim and, depending on the scale and nature of the unforeseen damage, review the cash settlement amount and discuss the steps needed.
  • Any additional costs that are not recoverable from the insurer and are the responsibility of the customer – which may include the costs of repair due to poor management of the work, re-work due to poor workmanship, or extra costs spent on upgrading the property.