Hidden Perils Under the Surface of Building Insurance

The primary purpose of building insurance is to protect property owners from financial losses due to damage to their buildings. 

Buildings can be damaged from a variety of events, including fires, storms, floods, and earthquakes, each posing unique risks and challenges. 

Exclusions and Their Impacts 

Policyholders and brokers acting on their behalf must apprise themselves of the exclusions in their policies to ensure they are adequately prepared for these risks. 

Building damage caused by subsidence or landslip can be devastatingly expensive to repair. While most people are familiar with landslips, subsidence is less known; it refers to the gradual sinking of land which can undermine the structural integrity of buildings, leading to severe and costly damage. 

Fortunately, many insurers in South Africa provide coverage for subsidence; however, there are exclusions that policyholders need to be aware of to ensure comprehensive protection. 

Typically, exclusions include damage to driveways, paving, swimming pools, tennis courts, patios, terraces, septic tanks, boundary and retaining walls, fences, gate posts, and drains. However, certain insurers may provide coverage for these areas, but only if they are damaged simultaneously by the same cause affecting the building. 

Additionally, policies often do not cover damages resulting from poor design or construction of the building. Exclusions also apply to alterations, additions, or repairs that are not executed properly. 

These are just a few examples of common exclusions. Policyholders and brokers acting on their behalf should carefully review their policies to understand whether policyholders are covered and which exclusions may apply. 

Failure to do so can result in devastating financial loss for policyholders and liability for brokers. 

Case Study and Legal Implications 

Coverage denial as a result of a subsidence exclusion was at the heart of the recent case of Tremblett v TD Insurance Direct Agency Ltd, heard in British Columbia, Canada. The insured homeowner, residing in Okanagan Falls, British Columbia, returned from a holiday to find sinkholes in his garden, along with cracks in the foundation and other structural damages to his residence. Upon requesting his property insurer to cover the repair costs, the insurer rejected the claim. The rejection was based on an engineering assessment that attributed the damage to soil subsidence beneath the house, triggered by groundwater movement. As a result, the insurer invoked the subsidence exclusion clause to deny coverage. Upset with the decision to deny coverage, the insured homeowner approached the court to challenge the insurer’s rejection. 

The court ruled, which was upheld on appeal, that the policy only covered loss or damage directly caused by water. However, the damage to the insured’s property was due to subsidence, which in turn was caused by water. Therefore, since water was an indirect, not a direct cause of the damage, the policy did not apply. 

Managing Traditional and Emerging Risks in Vulnerable Areas 

Certain areas are particularly prone to subsidence, such as those with extensively altered landscapes from urban development and mining, areas with natural clay-heavy soils, and coastal areas vulnerable to erosion and rising sea levels. Additionally, the increased sinking of boreholes due to the effects of climate change represents a potential new risk for subsidence, warranting careful observation and study. 

In these areas, insurers must periodically reassess and refine policy wording to ensure that exclusion clauses are clear, detailed, and aligned with their risk appetite. Policyholders must also be vigilant, diligently reviewing their insurance policies to fully understand the coverage scope and limitations to avoid the devastating financial and other consequences of coverage denial. Finally, brokers also play a critical role as they must accurately convey policy details and exclusions to their clients to prevent miscommunications that could lead to significant legal and financial repercussions.