After the flood – a brief guide to claiming on your insurance and other important things to know

14th February 2014

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Flooding has reached biblical proportions. Barely a day passes without more rain; animals are rescued in Ark-like boats; and the waters have reached and breached some of our most expensive residential areas – within an easy commute of Westminster. And it does not look like stopping any time soon. But once the waters recede, the big issue will be how to make up the financial losses. Financial journalist Tony Levene looks at ways to meet the costs.

Whether this is God’s wrath for our sins, the fault of the Environment Agency or global climate change matters little to those whose homes and businesses have been wrecked by the waters. But the great majority who remain high and dry will not escape higher insurance charges.

“Once in two centuries” weather events now seem to happen once every two years. And even if the politicians return to “business as usual”, the inundations will have a prolonged effect on national and personal economies.

It’s not just the instant cost and insurance claims. A week ago, accountants PwC estimated this at £630m with £500m going to policyholders. But that was before awareness of the waters rising on the outskirts of London, leading insurer Hiscox to now talk of a £1bn event.

With some 3,000 homes already affected – and a likely average £35,000 clean-up claim according to James Rakow, insurance partner at number crunchers Deloitte – that billion could prove conservative. And knock-on effects, including difficult to sell homes and developers having to waterproof many new houses, will add to the bill.

Insurance at the front door

Insurance insists you have to take reasonable care of possessions. So if your home is in any potential danger of flood, act before the water hits. Take note of weather warnings. AA Insurance is contacting customers in danger zones advising moving valuable items and small items of furniture upstairs or placing them on tables or worktops, to be especially careful to protect family heirlooms, pictures or documents that just can’t be replaced.

The AA adds: “It would also be good advice to move cars to higher ground if you can. Keep phones fully charged, and important documents handy.”

Failing to take precautions could make subsequent insurance claims harder. Here’s six tips.

But while some insurers are sympathetic and will do all they can to put things right as fast as possible, others might drag their feet.

Policies may not define “flood”.

The Financial Ombudsman Service says the big hurdle is that while most domestic and business policies for properties provide cover for any loss or damage that is caused by flooding, they do not define what a flood is. There may be a dispute over a flood was actually the root cause of the damage.

The FOS refers to cases where a consumer has noticed that a ground floor or basement room – that had been watertight before – has started to let water in. Here insurers may avoid payment having turned because it was not a flood, but a rise in the underlying water table. They claim the property “was not adequately waterproofed”, so any remedial work would simply be preventative – and therefore not covered under the terms of the policy.

The FOS says “a flood does not have to be a sudden and violent event – it can be where water enters (or builds up in) a property slowly and steadily – and it does not necessarily have to be caused by the forces of nature. So water escaping from something inside a property could be the cause of a flood just as a river bursting its banks can. It is the fact that water has built up and caused damage that it is important.”

Those who live in danger areas, even if they escape this time, will find two additional problems – future insurance and “sellability”. And the rest of us could face higher insurance premiums.

Getting cover next time

Insurers and the government set up a scheme – the Flood Insurance Statement of Principles – to ensure home owners in flood zones could buy affordable insurance since major floods in 2000. This deal expired in 2013 but remains in place until 2015 when a new scheme – Flood Re – comes into force. This is a not for profit company which will amalgamate risks across insurers. Those in areas likely to be affected will pay an extra premium based on their council tax band – from £210 to £540. And everyone else will have to chip in around £10 to £15 more on their annual cover.

But, like all insurance schemes, there are exclusions. Flood Re will not cover homes built after 2008, it will not cover the most expensive homes (Council Tax band H in England or I in Wales), leasehold properties such as blocks of flats and – perhaps most significantly – small business premises.

The Federation of Small Businesses says: “FSB research shows one in five small firms were affected by flooding last year alone and obviously this year threatens to be even higher. If the Government doesn’t add small businesses in areas at risk to this scheme many will be forced to pay exorbitantly high costs to be insured against this threat and some may struggle to do so.”

A quarter of claims in the 2007 floods were from small businesses.

Insurers are already working on thin markets and will see profits hit by the new wave of claims – that could force share prices down further.

Selling your home

If you live in a flood risk area, then you may find problems selling the property especially if it is excluded by Flood Re. Lenders may be unwilling to offer a mortgage given the uncertainty over insurance, just as they did with subsidence and ex-local authority flats above the fourth floor.

And while the lack of insurance could persuade developers to stop building in flood risk areas, that will only further serve to point out the dangers of buying an existing home that could be inundated with dirty water at any time.

 

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