Building insurance and the scope of works process - What is it and why is it necessary?

When major damage occurs to a building and an insurance claim is lodged, one of the most important steps (usually necessary) is the development of a Scope of Works (SoW). This can also be one of the most challenging steps for policyholders and their insurers to navigate quickly, before commencing repair and rebuilding works.

The processes for developing a SoW will vary depending on the policyholder’s individual circumstances as well as differences in insurer practices. The experience of staff from the Insurance Council of Australia, after participating in most major loss events for the last decade, is that the circumstances of individual events and policyholder needs can very wildly. Some flexibility in how individual insurers approach the SoW process can be desirable to enable insurers to determine the most appropriate process based on the needs of their policyholders, as well as to compete based on service delivery and claims satisfaction.

The Scope of Works

A SoW is typically prepared when a claim is made against a building insurance policy, for damage above a certain threshold (determined by the insurer).

IMG_0001.JPG

The SoW document lists the repair works required to meet a claim. The document plays an important role in defining the insured’s loss, and as the document is generally used to obtain building quotes once finalised, also quantifies the loss.

The SoW is typically approved by the insured before quotes are obtained.

The SoW is generally developed by a loss adjuster and/or builder acting in this role.

Loss adjusters may be operating on contract from a global firm specialising in loss adjustment work (for example, Crawfords, Cunningham Lindsay and others), or insurers may use their own internal experts.

Some insurers, particularly following a large catastrophe event, may employ large project building firms to perform assessments, quoting and repair work under a single service contract to enable a large number of claims to proceed in a timely manner.

A SoW is not always used to settle claims. For example, in cases where it is apparent that the insured’s selected sum insured amount is insufficient to meet the total cost of repair, the insurer may provide a cash settlement for the value of the sum insured and not complete a full SoW. A SoW may also not be carried out for repairs under a certain value.

The development of a SoW is usually an iterative process, and it is not uncommon for a cascading series of SoW to be developed as the damage that has occurred is fully explored and identified.

It is not uncommon for multiple versions of a SoW to be developed before all parties agree that it correctly captures the extent of the works required to complete repairs. Policyholders (especially homeowners) are usually the individuals with the greatest familiarity with the insured property and will often be able to identify subtle damage caused by an event that may not leap out at a loss adjuster on his/her visit to a property. It’s important that all parties work together in a reasonable way in order to get an agreed SoW.

On the whole, the Insurance Council has observed that the SoW process is generally a smooth one, but issues are expected given the complexity of some claims and the size of repairs required. Disputes are rare when taken in context. Severe Tropical Cyclone Debbie, March 2017, led to over 75,000 claims for damage being lodged. Of these, less than 400 have been disputed by claimants through the Financial Ombudsman Service, and most of those disputes did not relate to the Scope of Works process.

In our experience, some disputes over the SoW may occur because:

  • In some rare circumstances a policyholder may not believe that the appointed qualified assessor/builder is appropriate to perform the work. In some areas of Australia this will sometimes be because the assessor does not live in the impacted town, but may have come from the nearest city or interstate, or for especially large events may have been flown in from another country to assist. Insurers will typically make efforts to reassure policyholders regarding the quality of staff deployed to assist and do not readily employ contractors who are not going to be able to successfully carry out the job. If you have a concern about the people attending your property, speak to the insurer about those concerns.
  • There may be pre-existing damage to the property. In cases where the assessment of the property reveals that the pre-event state of the property was not as disclosed (when insurance was purchased), the claim may falter or specific repairs may be declined. For example, if a claim has been lodged for cyclone damage to a home, but upon examination it is clear that the roof was already in a bad state of repair (eg rusty, missing fixtures, lifted from battens), the scope of works developed might not include repairs to the roof. Insurers will typically only take this step in the most blatant of circumstances, where pre-existing damage or a failure to maintain the property (leading to or exacerbating the subsequent damage to the rest of the building) is acutely obvious. 
  • The policyholder may engage a ‘claims servicing company’ who, typically for a percentage of any cash settlement offered by the insurance company, will review the proposed SoW to enlarge the scope (therefore achieving a higher return of the cash settlement). If the process is poorly executed, a claims servicing company may frustrate progress in an effort to gain a greater percentage return, his/her fee. This may happen by delaying responses to the insurance company and/or insisting upon the addition of works not able to be covered by the policy. This process often forces the policyholder down the path of asking for a cash settlement, rather than having the insurer’s builders performs the repairs, which can have a number of consequences for the policyholder (see blog post on ‘cash settlments’). However, if the claims services company operates in a collaborative manner and has professional officers, it can sometimes enhance the claims process, with some insurers accomodating additional items. For home claims the use of a claim services company is usually not necessary. If you are going to engage a company to manage your claim, ensure that you satisfy yourself that they are a legitimate service, who are well resourced, with a good track record. Make sure that you understand how they will be paid (flat fee or as a percentage of your settlement), ask for independent references and ask for guaranteed results. Unfortunately, there are unscrupulous individuals who will door knock offering services after an event, for example to manage your claim or do trades work. You should exercise the same caution as you would with any unsolicited services.

If you have questions about your claims process, your first call should be to your insurer. If you are still confused or concerned you can call the Insurance Council’s hotline on 1800734621 to speak to an expert who can, if necessary, seek clarity on any issues for you.