It is an interesting setting; the reference comes from one of Sierra-on-Line’s most famous games called Space Quest, in this game we see the hero going up against Vohaul and his evil plan: to eradicate sentient life by launching millions of cloned insurance salesmen at the planet!
That game came to mind the moment I was treated to ‘Grenfell-type cladding on London flats to be replaced at insurer’s cost‘ (at https://www.theguardian.com/society/2018/jul/09/grenfell-type-cladding-on-london-flats-to-be-replaced-at-insurers-cost), in this we all might seem relieved, but the truth is hidden in the subtitle with ‘Decision over New Capital Quay could have repercussions for other apartment blocks’. This is the setting and it was never going to be a win-win situation for the house owners. We see the emotional part with “A second family, which has seen the value of its London flat slashed from £600,000 to just £90,000 because of the Grenfell-style cladding, was thrilled to learn they no longer faced the bill“, I am happy for that family, I truly am, even with the first example the Guardian gave. Yet the hidden trap is not invisible, it does not hold out in camouflage. The simplest question gets you there. How much effort have you gone through to get your insurance money? I have been through it twice in my lifetime and in the end it costed me more than the premiums ever did. When it comes to insurances (beyond third party insurance) you tend to never ever win, or break even.
You see, getting an insurance firm to part with money is a bit of an issue. So when I see that they are footing the bill, all kinds of red flags went up. In Victoria (Australia) we saw in 2015 “Victorian Building Association (VBA) conducted an audit of 170 building permits following an Melbourne apartment fire that climbed 13 floors in November 2014, causing $2 million in damages, due to combustible wall cladding used in construction“, and until you get the headline ‘cladding hazard may nullify claims‘, you might not get the essential one. This is not any different in the UK. In addition there is (from another source) “However, a good number of policies stipulate that if you’ve told your insurer you have fire alarms, they must work. If an insurer finds that a home’s fire detectors weren’t functioning correctly at the time of a fire, they might reduce the claim pay out, or even turn it down altogether“, as well as “Did we have working fire alarms? Did we have a fire blanket in the kitchen and extinguishers in the house? Was there an up-to-date electrical inspection report? Luckily, we complied, but similar issues apply to almost any policy“. Now consider these parts with the Grenfell like issues seen in: “The Guardian has learned that another deficiency notice from the London Fire and Emergency Planning Authority (LFEPA) was issued on 25 January in relation to all 11 blocks in the complex. It identified 16 fire safety issues, including a lack of arrangements to evacuate vulnerable and elderly residents, an ineffective maintenance regime, a broken firefighting lift and a broken fire hydrant outside one of the blocks. It found that “the procedures to be followed in the event of serious and imminent danger to relevant persons are inadequate”, raising residents’ fears about being trapped in the event of a fire“, which is given to us (at https://www.theguardian.com/society/2018/feb/15/further-defects-discovered-at-housing-with-grenfell-style-cladding).
So in these cases, we have an insurance problem, the building is not up to specs, and any fire voids the insurance, in most cases the home insurance is also affected, yet the insurers are covering it all this time. This is not merely the Grenfell setting, all the buildings are covered. Yet what we are likely to see is that this is a quick return on investment from the insurers. You see, there is every chance that the premiums will go up between £120 and £360 a year next year onwards. Now consider that this is not merely handed to those buildings fixed, it will most likely be an overall premium increase of 1%-1.5% for every building in London, which will give the insurance companies an expected £12m-£36m per year for the next 5 years at least. So the quote “Residents, who were facing a share of a bill estimated at between £25m and £40m for cladding and millions more for round-the-clock fire wardens, were elated with the news” gives us that the insurers will take an optional short term hit with the turning point in year 2 and large profits after that. It seems like a nice business deal for them, and in light of the avoided costs most will not blink at being happy, even when the new bills arrive.
Part of that danger is seen in things like “Common buildings insurance exclusions may include: Damage from general wear and tear & wilful neglect of the property“. That part matters, because the failing fire doors, non-working water pipes for firefighting as well as other elements. Now add the quote from the Conversation (at http://theconversation.com/yes-the-grenfell-tower-fire-is-political-its-a-failure-of-many-governments-79599), which was: “Worse, it has been reported that the London Fire Authority actually wrote to all boroughs as recently as April, advising them of their concerns on the use of some kinds of cladding panels. A number of expert reports have argued in favour of revising the building regulations, notably following the inquiry into the 2009 Lakanal House fire in Southwark in which six people died. The fact that the Lakanal House fire was eight years ago and building regulations have still not been updated demonstrates a complete failure to learn the lessons from previous disasters and take speedy corrective action“. We now see a clear path to both ‘Damage from general wear and tear‘, the fire doors and ‘Wilful neglect of the property‘ optionally the fire doors, the writing of the Local Fire Authority and the non-actions on the cladding. In these cases as well as most other buildings the insurance companies can basically walk away, leaving the tenants with a nightmare scenario. They did not and there is decades of evidence that insurance companies are in a black letter law cold environment in the heat of pretty much every fire. So this is about more than merely ‘a helping hand‘. This is about the SWOT where their position was in strength; the building cooperation as well as the local government were in a place of Weakness, the Opportunity is a nice premium rise giving them many millions a year more, with one year as optional collateral loss and the Threat is close to none, optionally the initial builders will get billed to some extend as well, making the optional losses for the insurance companies even lower than initially penciled in.
For this and the previous government it is a quick fix as well as a nice setting where everyone walks away without an invoice, the only thing that this government has to agree to is the coming premium rise and as the amount seems small, they will not oppose it, the one thing that bites is that all home owners will be likely to get that increase, cladding or not. And as we get bad news management through optimistic news, we see messages like “Flood Re confirmed that the announcement comes on the back of its decision not to pass on the annual increase to premium thresholds in April“, yet later this year we will with a decent measure of ‘most likely’ get news like: ‘The added risks as well as the additional costs of upgrading the buildings that have Grenfell like cladding have forced us to add a short term increase to all premiums, so that there will be no dangers to those currently in hazardous setting of coverage against fire’, yet I personally feel certain that all those not in those buildings, where the rule “Common buildings insurance exclusions may include: Wilful neglect of the property“. Those people will still take a hit on their claim if they have one.
I admit that a lot of it is based on personal experience (not fire based though) and in light of thousands of complaints in the past, my vision in what is likely to happen, might be correct and even conservative in the projected changes. Even as I am willing to grant the response that we see with: “Then we arrive and we are the big bad wolf, because the claim is not covered“, I personally see this as the people expect a spirit of the insurance setting whilst insurance firms see only a ‘black letter insurance policy setting‘. It is a view that the legal minds understand, but that might be the only group that does. It is an idiomatic antithesis that tends to settle in the world of laws (especially taxation laws). It is important to understand that I used to see the insurance companies as ‘white collar criminals’, but not anymore. I think that this is a deeper issue that we are all mostly ignorant to. It is almost a given that spirit of law and letter of law should be taught in secondary school. It is an important skill for anyone to have by the time they get their first house and get the insurances they need. It is an important view as this one setting in London giving us the realisation that the insurance companies are embracing the spirit of the insurance, not the letter of it; yet I personally believe that this is done to create a windfall that gives these companies millions down the track for a very long time to come. We can argue that they offer a cheaper solution for those who are faces with many thousands of pounds in cladding costs, yet others will not feel the same. I was not alone in this path, Reuters gave us last October “While they cannot change existing insurance cover, renewals, many of which fall due in Jan or April 2018, will give them a chance to adjust prices or policy wordings to mitigate their risks“, and so they already had something. The question becomes, what is the cost of mitigating risk? The people will find out when they get their news premium invoice in 2019. Then we can see just how conservative my numbers were. I do expect to see the changes being released earlier that year as it will be an option for insurance companies to poach new customers from those giving voice to higher than expected premiums.
So even as we were given “AXA had upgraded its administration so that information on the number of tall buildings it insures or the type of cladding they are using is more easily available, helping to identify risks quickly“, as well as “Zurich Municipal would work with customers “to help them manage these exposures”“, the question is what exposure?
Is that exposure to the expected risk, or to the risk of getting exposed to upgraded premiums?
Lawrence van Rijn - Law Lord to be 