On Mon, 01 Nov 2004 10:59:21 +0000, The Natural Philosopher
wrote:
That's an excellent clarification of what might happen. I hope you don't
mind that I have run it through spell check to fix the typos.
You may be interested in this little true story.
A man has a house, bought for £155k on a mortgage.
In difficult times, he cancels his insurance policy on it, and
re-mortgages it cheaper. No one asks to see a valid insurance certificate.
It wouldn't be of use anyway once it expired. Presumably that was the
reason that mortgage companies used to insist you did the insurance
through them. Since that privilege has been removed from them, it looks
as though there is a loophole by which you can become uninsured and
they don't notice.
Times improve, and the wife is asked to re-insure it.
Not understanding that the house is in fact completely uninsured, the
wife gets a contents policy on it.
The house burns down to a shell.
There is a huge legal kerfuffle, with the man claiming that if the
mortgage company have, by dint of having crap paperwork, not checked the
validity of insurance, it's their problem.
Did he win that case?
However, finally the shell and plot is auctioned for £150k, and all is
cleared up.
Presumably that £150k all went to pay off the mortgage company, and your
man was left without a replacement house. Was it the case that he had
not paid off any of the mortgage, so the house wasn't really his anyway?
The cost of re building the shell is about we estimate £100k, and the
new house goes for £300k.
You lost me here... Do you mean someone else re-built on the plot and
sold on for £300k? In which case they made a gross profit of £50k
(300-100-150)k.
One thinks that the owner would have in fact simply auctioned the
plot/shell himself, except the mortgage company wouldn't have let him.
Fair enough, if he had not built up any equity in it.
The mortgage company has lien over any property it lends against: Their
concerns are purely and simply to have insured the difference between a
worst case accident and the cost of getting their money back, IYSWM.
Yes.
You, as a property owner, faced with a wholly owned burned out shell
etc, may do what you, like up to and including abandoning it and moving
on. However it's hard to establish what the claim value should be if you
do this. Whereas if it's rebuilt with reasonable quotes presented, they
can agree to pay the rebuild cost.
Agreed. In my scenario the insurers would need to agree in advance what
the insured value was; either an actual value as established by
independent valuers (might be tricky if the house has gone), or by
simply agreeing in advance to pay a fixed sum (the insured value) less
any residual plot value. That is my 'comprehensive car insurance'
analogy. I'm beginning to think the reason this is not used (as far as I
know) is the difficulty of establishing the value after a catastrophe.
In the case of a mortgaged property, you are not free to act: The
mortgage company will more or less insist that you either continue to
pay mortgage on the full value of the loan, or [they] repossess the house.
Or you redeem the mortgage with any insurance pay-off. However, I think
they would normally get in first with the insurers and take that option
without your say so.
The only case in which you might care to insure over the rebuild value,
is if there is a chance that the whole site might become uninhabitable
due to e.g. falling in the sea, or becoming contaminated with
radioactive waste. Most insurance companies won't touch that sort of
policy anyway.
If the re-build costs are less than the value. I take the points made by
others that you can build *a* house for less, but I'm fairly sure you
could not re-instate a very similar house complete with Victorian
features - high ceilings, large rooms, steep roof, etc - AND comply
with modern regs for the current value, in most parts of the country.
Is it the case that the re-build standard you can expect is normally a
modern house of about the same value as your old one, and of course with
the same address?
Note that if the estimates for rebuild exceed the insured for value, you
won't even get the full insured value out of the insurance company: You
can lawfully be adjusted down to the fraction of the insured value
represented by the insured value versus the rebuild cost.
i.e. if your house cost 500k to rebuild, and its insured for 400k, you
may only get 4/5 of 400k. or 320k.
Yes, that is how under-insurance works. They never pay out extra if you
are over-insured of course!
I've come across that gotcha in contents insurance. Adjuster started
saying that 'my furniture was worth far more than insured for, therefore
I am under insured, therefore he would only pay out 50% of the value of
the TV etc stolen, until I made a point that none of the furniture was
bought new, and was at best reclaimable from skips and junkyards at a
couple if grand. That shut him up.
It always pays to negotiate. You're lucky he didn't riposte with an
offer just enough to buy a telly from a junk shop. I always knew that
you should keep evidence that you paid full price for something of value
- it never occurred to me that you need to have evidence that your stuff
is virtually worthless :-)
Do take insurance seriously. IF you e.g. have a flood, and they consider
the house is under insured, you may not get full returns on e.g. flood
damage, even if the sum you claim is far far less than the 'insured value'.
Read the fine print, and any issues get a letter in writing clarifying
their policy that you can wave in their faces if you ever need to. AND
make sure its not in a cardboard box in the attic. Fireproof safe.
These days a digital photo kept on a website archive can be a good
safeguard for documents.
Mind you, the letters to and from the company in the case of the real
example I quoted must have got burnt, because that's what the man
claimed, that he had done X and Y, and it wasn't his fault that the
mortgage company had lost their copies when they got taken over etc etc 
Thanks for the interesting post.
Phil
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