Real estate insurance
In the question of the right measure, however, he often finds himself in a dilemma between too much and too little. The following article offers tips for decisions that are coming up.
Many buildings are poorly insured. Owners and managers repeatedly expose themselves to enormous liability risks here. We would like to take the drama of the Cologne subway construction (total loss due to building collapse as a result of third-party fault), which is still present to us all, as an opportunity to use this example to address some important peculiarities which must be taken into account when taking out property insurance and the interaction with compensation claims from a property loss against a liability insurance. The following are some typical case constellations in which inadequate insurance cover occurs time and again in practice.
Liability insurance only covers the current value
The liability insurance – in this case of the building owner, the building contractor, the architect and/or the responsible supervisory authority – insures the fault-based risk of legal claims for damages under private law. The claim for compensation exists independently of the course of the damage, but only up to the amount of the current market value of the destroyed/damaged object. The fair value is the value as new less the reduction in value resulting from age and wear and tear. Many have certainly already made the experience that the opposing motor vehicle insurer limits its compensation payment to the current market value in the event of damage to its own older motor vehicle for which compensation is payable due to “economic total loss” in the event of a traffic accident for which the other party was at fault. Thus, the responsible liability insurer in Cologne will also limit its compensation to the current value, which will only cover a fraction of the restoration costs of the damaged/destroyed buildings. In contrast, with certain property insurance policies (such as buildings insurance), the sliding replacement value can be insured, i.e. the customary new construction costs that would have to be incurred to restore a destroyed building to the same location and in the same quality.
The destroyed house during the construction of the subway in Cologne has gained sad notoriety. However, entitlement only exists in the case in which the building is actually restored.
Property insurance cover only for named perils
In contrast to liability insurance, a claim for compensation in property insurance only exists if the damage occurred as a result of a peril insured under the respective contract and no contractual exclusion (such as an event of war) applies. The respective contractual definition of the risk must be fulfilled. For example, storm damage is regularly only insured from wind force 8. Braising and scorching damage do not meet the standard definition of peril in fire insurance. Even if the damaged buildings in Cologne were insured against “other named natural hazards”, the building insurer will not pay, as the collapse was not due to ‘ subsidence (natural lowering of the ground above natural cavities) or ‘ landslide (natural slipping or falling of earth or rock masses). Only if the buildings were also insured against “unnamed perils” could there be a claim for benefits against the buildings insurer. If a property insurer pays compensation (e.g. in the amount of the replacement value) for damage to its customer’s insured property caused by a third party, the customer’s right of recourse against the party responsible for the damage, which exists under certain conditions, is transferred to the property insurer. A number of fire insurers have joined the so-called waiver of recourse agreement: Under this agreement, recourse is waived for losses above 150,000 euros, but only to the extent that the loss does not exceed 600,000 euros. Of course, this should not be relied upon under any circumstances when determining your own liability insurance amount.
Underinsurance for property management companies
Some property managers tend to agree only a lump sum of, say, one million in homeowners’ and landowners’ liability insurance for the properties they manage. This can prove to be a serious mistake if there is a fire and the fire spreads to numerous buildings due to dense development in the surrounding area or in the case of terraced housing. Depending on the location of the property, even ten million may be too low a sum insured because of the overarching fire risk. Furthermore, it then depends on how the other buildings or parts of buildings are equipped. For example, fire damage to a medical practice is much higher than for pure office or residential use. In large loss practice, the administrator then first goes into insolvency – and the underinsured liable owner or tortfeasor then faces a similar fate. The agent, also called the insurance representative, is a “representative of the insurance company”. From the customer’s point of view, it is always cheaper to use a genuine insurance broker who compares different terms and conditions. If the manager himself arranges the insurance for the properties he manages, experience shows that dramatic gaps can be found in his own insurance cover.
Insurance risks when architects are involved
For larger construction projects, including refurbishments, an architect is usually commissioned with the planning. The minimum amount of coverage for other damages (property damage and financial loss) of about 250,000 euros in a pecuniary damage liability insurance, which is prescribed by law in the federal states for architects, is seldom sufficient. However, even in the case of higher agreed sums insured, gaps can arise because the sum of the risks “on fire” each year has not been determined: In the event of a loss, the sum insured may be completely or partially exhausted by another loss in the same year. Therefore, the builder or his agent (for example, the property management company) should always check whether independent project coverage of the architect is possible and reasonable. But here, too, traps can beckon due to poorer terms and conditions. In addition to the professional liability insurance, an environmental damage insurance (USV) should exist in any case for the commissioned architect, and usually also for the property manager. In the UPS architect’s cover, it must be agreed that the insurer will also pay in the event of a planning error (without there having to have been a breakdown). For the understanding it is important that the USV concerns public-legal claims for damages – on the other hand in a pecuniary damage liability a coverage is regularly available only for private-legal liability facts.
Liability for pecuniary loss
In almost all pecuniary loss liability insurance policies, so-called “knowing breaches of duty” are excluded from the insurance cover. This addresses elementary basic rules of professional practice. For example, when planning a roof with a few degrees of pitch, an architect must not forget the multiple insulation of a flat roof. Such particularly gross errors are never insured. This exclusion of insurance coverage also affects the case where damage occurs due to work overload and the resulting delays. In addition to architects, this of course also applies to property managers. Such gaps in cover can sometimes be closed by means of foreign insurance offers. The topic of the correct insurance usually concerns contractors and clients, because in the event of a claim, it can have existential consequences for both sides. For this reason, it often makes sense to seek external advice together and to always document this well in writing for reasons of evidence.
by Dr. Johannes Fiala
by courtesy of
www.immobilienwirtschaft.d (published in ImmobilienWirtschaft 05.2009, pages 53-55)
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About the author
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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