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How house insurers and the building regulators can cause you financial ruin

There is a crippling home insurance loophole that affects all policy holders. If your house is damaged in an insured event, most, if not all, policies exclude cover for upgrading the undamaged part of the house to meet new building requirements, either explicitly, or by omission. However if your house is damaged, local council planning regulations and the Victorian Building Authority can force you to upgrade the ENTIRE house if the repair affects over 50% of the house volume. This can effectively be a fine of hundreds of thousands of dollars for owning a home older than the most recent building regulations. What other crime would you have to commit to face that sort of penalty? The councils and VBA don’t care how much financial, emotional and mental distress they cause, and the insurance companies claim they can’t insure against unknown futures. Isn’t that what insurance is for? This is not underinsurance, because the companies don’t provide the option of cover at any price. The only way to avoid this is to not own a home, or to avoid calling the fire brigade. This is a major scandal created by the unelected, power-crazed, self-righteous building authorities and the avaricious insurance companies and their executives.

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The building authorities have powers derived from Acts of parliament that are created by elected representatives, they don’t just invent this stuff out of nothing.

Look at it another way, when building codes are upgraded house owners get a free pass in that they do not have to immediately upgrade existing buildings. If the house is destroyed it has to be replaced according to the new code, otherwise you could end up with new buildings being built all the time that are outside code. You may or may not agree with that.

I don’t know how you decide if it is reasonable to apply that rule if more than 50% is destroyed but the principle is the same. This outcome does seem harsh to me. Would it be fair to only apply that rule if the house was 70% damaged, what about 90%? I don’t know, it’s a tough one and I can see it going wrong sometimes no matter what you do. I don’t see how making such a decision makes anybody self righteous or power crazed.

If the whole industry refuses coverage in some situations one has no choice but to bear the risk yourself. All companies are avaricious in the sense that they are trying to make a profit. Expecting them to cover you for unknown or excessive risks, and probably lose much money, is not reasonable. If that principle was widespread then nobody would want to be in the insurance industry and you would have to self insure for everything.

Consider a different kind coverage, that is for floods. In many cases the owner of a house in a flood zone cannot get coverage. They may not be able to sell up and move into another area to avoid this and sometimes there is a flood and they lose everything. That is a very similar situation to the one you describe that shows life doesn’t come with a money back guarantee, there are times when you just have to bear a risk yourself. I don’t mean to sound heartless but that is how it is.

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This is also a common condition wider than just Victoria, applied when carrying out major renovations, additions, or simply relocating an existing property.

It does seem unfair. You can’t just upgrade part of a property once a certain amount of works is required. It’s unlikely to change as there would be many would be renovators taking advantage of what would be a loophole for all.

It may be worthwhile talking directly to your local councillor and in person with their planning staff re your circumstances. Ask what you need to do to apply for an exemption on the non damaged portion. Providing evidence that your insurer will not cover the added costs would also make sense.

On more than one occasion I’ve been able to obtain one off concessions by dealing directly with the council. In general the architects, Certifiers, Builders etc all find it less bother and more profitable to follow the easy path of them is the rules. It’s important to put every request clearly and directly in writing, as well as documenting all discussions.

P.S.
For our current home if it was lost to flood or fire it would be near impossible to replace with a like for like upgraded to current fire protection building requirements. But any attached extension must be BAL rated. Doubt that makes any real difference once the rest is alight.

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a) If one has an old enough home the wiring might be uninsulated wound through the walls on insulating posts. The safety circuit is open wire fuses.

b) Moving on, the wiring as installed had to be insulated but open wire fuses were still OK.

c) Then the box had to have at least a single safety switch

d) Then each circuit needs independent safety switches

e) Then the wire gauge throughout has to be heavier to account for the increasing power demand of mod cons

f) Then …

Would you be comfortable if your insurance premium for a house at ‘a’ was reset every year with an assumption that ‘f’ (then ‘g’, then ‘h’, year upon year) had to be met if a serious claim had to be paid out?

Even vehicle insurance will not pay to match paint on an entire vehicle, it will just pay to paint the affected damaged area. The paint will usually match, but sometimes it won’t or doesn’t, and sometimes it cannot be made to match.

Insurance is always a product to share losses or pay for the repairs of a documented set of circumstances, it is not a product to make the policy holder whole again, save for some exceptional bespoke policies often underwritten by Lloyds.

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Not only meeting current building standards, what many don’t realise is if your dwelling is a character or a heritage house, if it is damaged often it is a requirement of State or Local Laws that the house must be returned to pre-damaged condition to ensure that the character/heritage values are preserved. Often insurance policies cover for the cheapest repair option rather than meeting pre-damaged condition to preserve values. The cost difference can be substantial and asking if a dwelling is character/heritage isn’t usually a standard question when filling a retail insurance questionnaire.

If an insurer doesn’t know the dwelling is character/heritage, it is most likely that the dwelling will be underinsured and a home owner could be significantly out of pocket should a tragic even occur which results in considerable damage.

Retail insurers also often won’t insure character/heritage dwellings as the risk can be great. It often requires going to a broker and getting specialist advice and approaching underwriters directly to see which ones are willing to provide cover.

It is important that insurance policy PDS is read to understand what is covered and whether the cover meets your needs (and suitable for the dwelling being insured).

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We do not have to accept ‘how it is’, insurers can lift their premiums slightly for those who want the cover??? They have many options available for them - but love their ‘fine print’ - it’s where they hide their profit !!!

True, you can self insure.

I don’t know how they make the call when to adjust premiums to cover greater risk and when to refuse coverage altogether. I am not in the business and not an actuary. I suspect one of the reasons they refuse is when they can not get an accurate assessment of the likely payout, that is they cannot determine the likelihood of having to pay or the amount, or both.

Sometimes they will reject cover because of the possibility they may have to pay out. A case in point is that Allianz will almost uniquely decline contents insurance beyond a certain value if 100% of windows are not equipped with locking dead bolt devices or have external burglar bars or security shutters, any of which could lead to serious injury or death in event of a fire. None of their competitors have been as unbending with that requirement.

Needless to add I do not insure my home or contents with them.

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Insurance is advertised as offering to reinstate the home back to before the loss. If the fine print prevents that, it’s deliberately deceptive. Only the building authorities know when rules change and how they apply them. They should tell the Insurance council, who should make the new actuarial calculation, advise all insurers who can then update their policies, provide options to increase cover and alert the home owners. It’s totally impractical to expect that every year, every home owner in Australia to check the rules, get building surveyors and councils to rule on how the new rules apply to their house, then get builders’ quotes, presumably for a whacking great fee every year, then waste a whole lot of time chasing new insurance policies.

Road rules dont force me to repaint the whole car or install a Rolls Royce engine just because a few panels are dented.

I’ve been looking at our upcoming renewal. A different state, but generally similar principals appear to apply.

‘Can’ or ‘shall’. What does the actual regulation state?
The VBA has a procedure for resolving issues concerning regulations and enforcement.

Without details of any existing disputes or precedents at law it seems hypothetical. Knowing a full rebuild in the instance of total loss would need to comply with the most recent regulations, it would be prudent to ensure the sum is adequate for the worst outcome. Thereafter for a partial loss, perhaps there is no precedent?

Insurers in this example do attempt to reflect changes when they revalue policies.

If your home is like every other in the area, less of a concern than if it is very different.

The concept of being repaired to an updated standard doesn’t apply in that case. Giving us an analogy doesn’t help if it doesn’t fit the situation.

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If you don’t read the inclusions/exclusions and fine print before buying insurance then if you are surprised by one of the clauses preventing your payout it is not the fault of the insurer. I don’t enjoy reading these things but today my insurer puts it in plain English and it isn’t that long. Worth the trouble as far as I am concerned.

If no insurer offers cover then you don’t need to read the policy fine print or do anything about the changes in the BCA or value of repairs your house, you don’t have cover anyway.

Back to the original question, if 50% isn’t right at what level of replacement should the latest building code be required?

Syncretic: This is not about underinsurance, voluntary extensions or alterations, or failing to read the policy.

Every year, we follow the insurance broker’s recommendations to increase the sum insured, based on a calculator used by the insurers themselves.

The VBA rules say “if the proposed alterations to an existing building, … relate to more than half the original volume of the building, the entire building must be brought into conformity with these Regulations.” There is an exception for non-structural repairs but, in the case of what should just be a like-for-like repair of a roof, because it involves replacing supporting beams, the insurer’s Building Surveyor and Engineer are applying this rule to require the entire house to be upgraded. Ironically, a voluntary extension by up to 49% of the floor area would not invoke the same requirement.

The insurance policy includes: “We will pay the reasonable costs to meet current building regulations” (up to 10% of the total sum insured), but “We will not pay any costs associated with … upgrading undamaged parts of Your Buildings to comply with current building regulations and laws.” The loss adjuster and insurance broker claim that no policy in Australia covers such upgrades. The only other policies I have found have similar exclusions. They have made it clear that no amount of extra insurance can cover this situation.

MarkM: The final outcome is unclear until after the event because it is subject to potentially unclear wording (“relate to”) and thus the personal interpretations and discretion of multiple authorities. For some bizarre reason, local council planning regulations have a similar requirement. But even if they are satisfied, interpretation of the VBA rules is up to the appointed Building Surveyor, but not until after after plans are drawn and a building permit is applied for, which is after a building contract is entered into. For a final decision, it is possible to appeal the Surveyor’s decision to the VBA, then appeal that to the Supreme Court (at who knows what price, delay and stress). That’s why “May” not “Will”.

Hence the subject of my original post, and why if your house is only damaged the insurers and regulators can put you in a worse position than if it is destroyed.

Everyone: If your home insurance policy covers the full upgrade costs of the undamaged portion, then please provide details, so I can bring them to the attention of the broker and insurer who deny the possibility.

Syncretic: As far as I am concerned, a like-for-like repair of accidental damage should not invoke any upgrades of the undamaged portion, except where it is necessary to enable the repair (eg replacing old wiring), and that should be covered by the insurance. If they wanted to, the whole problem could be avoided by the insurance companies and regulators adjusting their mindset and processes to work together in the interests of the people who pay their wages.

My reference to cars was in response to PhilT’s “Even vehicle insurance will not pay to match paint on an entire vehicle”.

phb: Total cleft stick here: VBA says upgrade it. Heritage says keep it original. Obviously needs competing authorities to use some sense.

Heritage values will override any modernisation or upgrade. Heritage is about maintaining values through legislation. …to ensure these values are there for future generations. However, any structural work, plumbing, electrical etc will need to be installed to the relevant code/standard.

Are we still talking hypothetically?

If there is a genuine insurance claim and example in dispute or disagreement it may be best to lay the facts bare.

If it is a discussion re how things might be, there seem to be too many assumptions to be certain of a particular outcome. That might seem a circular argument.

It is not an argument that assures the worst outcome as imagined. Nor does it justify any particular recommended solution including permission to rebuild without any improvement.

Insurance is what it is.

How any Impasse between building regulation and insurer might play out, who knows. That’s the way the law works.

As to needing a building contract to get building approval! That’s not how it works in our state. Building approval is not conditional on a contract. A compliant builder can be nominated after approval, with completion of approval conditional on advising a compliant builder.

Rather than get caught up in process, talking one to one with the respective LGA and State Depts would be my first steps navigating any special circumstances. Certainly my personal experiences, although limited to three different LGAs in Qld suggest practical outcomes are achievable.

As a single simple point. Where one needs to spend extra to upgrade the undamaged portion of a property to meet latest regulation. Would that not be reflected in the increased future value of the property? It does appear a personal expense, and not one insured for or at risk?

This was never hypothetical. It’s not some adolescent point-scoring game. It’s very real, and very threatening. We are constantly trying to talk to the regulators and insurers, but they all hide behind arcane, self-serving processes. If we are forced to upgrade at our own expense, it won’t add a cent to the resale price before the accident.When did anyone pay more for a house just because it complies with recent regulations? It will just be a fine for owning a house that’s older than ten years that was only damaged instead of destroyed by an unavoidable accident. If that’s the way the law works, then the law is an ass, designed by a committee of asses.

Apologies, if I misunderstood. Your property has been damaged seriously by a significant fire, but not to the extent it is to be fully demolished.

Taken as factual.

The outcome in Victoria may be different, to other states, depending on circumstances.