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Under Anglo-American common law, Ungern-Sternberg (2004) reports that, "When a property has changed owner, it is quite possible that no insurer is liable for subsidence damage, even though it has been permanently insured. Many homeowners suffer from the illusion that their building insurance will automatically pick up the whole bill but some have found this an expensive pipe dream" (p. 49). In reality, when consumers purchase a new home, it is carefully inspected and all known faults are identified, but unknown faults are also inherited in the transaction (Ungern-Sternberg, 2004).
Consequently, the experiences of many homeowners to date have been encounters with previous policyholder's insurance company disavowing responsibility for such damage as well as the new insurance company that will argue the damages are the result of pre-existing conditions. This nebulous area of building insurance remains controversial, and Ungern-Sternberg (2004) emphasizes that the practice continues to adversely affect building purchasers. According to this authority, "When a house is sold, the vendor's insurers come off risk and the purchaser arranges for new insurance. There is no connection between the two policies even though they insure the same premises. The purchaser cannot claim against the vendor's insurers, under the old policy, for subsidence which occurred before he acquired the property. This strikes many people as unfair" (Ungern-Sternberg, 2004, p. 49). Clearly, there are a number of factors that must be taken into account when formulating the optimal building insurance coverage, but it turns out that there are some other issues involved in the process as well that are worthy of discussion as noted below.
The laws concerning building insurance vary from state to state and country to country, but in those jurisdictions where they are mandatory, studies have shown that policyholders only maintain required levels of coverage as long as compulsory building insurance laws are in place and then quickly reduce their coverage (Bonato & Zweifel, 2002). Likewise, the research to date concerning insurance choice for automobile insurance and homeowners' policies has determined that consumers prefer low-deductible policies, even in those cases where such alternatives are not supported by rational financial decisions because of the higher prices that are charged to cover the cost of processing small claims (Michel-Kegan & Kousky, 2010). This penny-wise and pound-foolish approach to building insurance indicates that some policyholders are ignored the harsh realities of the weather and the destruction it can unexpectedly cause. When the power goes out, consumers are affected of course, but businesses can be disrupted to the point where they may be in danger of losing everything unless they have adequate insurance coverage to protect from such losses. In this regard, the Society of Chartered Surveyors emphasizes that, "It is sometimes thought that the market value of the house, in other words the price achieved when the property is sold on the open market, is the value for which the property should be insured. This is, however, irrelevant as the market value of a property generally has little relationship to the reinstatement value" (Are you fully insured?, 2011, p. 2). In order to be adequately covered for this eventuality, then, building insurance policyholders must ensure that their property is sufficiently insured (Are you fully insured?, 2011).
The research showed that the economic costs that are associated with natural disasters are enormous, and these costs have been on the increase in recent years, making the need for appropriate levels of building insurance coverage an important part of doing business and owning a home. The research also showed that common types of insurance that fall under the umbrella term "building insurance" include property insurance, boiler and machinery insurance, debris removal insurance, ordinance or law insurance, business interruption insurance, inland marine insurance, glass insurance, and builder's risk insurance. The combination of these different types of coverage depends on the unique circumstances that are involved, but the research was absolutely consistent in highlighting the need for adequate building insurance coverage to mitigate against unforeseen disasters. In the final analysis, building insurance should be regarded as a necessity rather than a luxury or a gamble where it is not compulsory given the potential for costly and potentially devastating outcomes otherwise.
Are you fully insured? (2011, March). Society of Chartered Surveyors. Retrieved from http://www.scsi.ie/publications/Downloadreport/hri2011.
Black's law dictionary. (1991). St. Paul, MN: West Publishing Co.
Bonato, D. & Zweifel, P. (2002). Information about multiple risks: the case of building and content insurance. Journal of Risk and Insurance, 69(4), 469-471.
Hoffman, a.V. (2003). House by house, block by block: The rebirth of America's urban neighborhoods. New York: Oxford University Press.
Mayo, J.M. (1999). The American grocery store: The business evolution of an architectural space. Westport, CT: Greenwood Press. .
Michel-Kerjan, E.O. & Kousky, C. (2010). Come rain or shine: Evidence on flood insurance purchases in Florida. Journal of Risk and…[continue]
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