Part 1: Happy Surge Year! The rise of subsidence claims in 2018/19

After last year’s long, hot summer subsidence claims have surged to their highest level in 12 years. The third quarter of 2018 saw more than 10,000 households make subsidence claims on their household insurance, totalling £64 million, almost four times as many as in the previous quarter. This quarterly increase, the Association of British Insurers has said, is the highest quarterly jump since records began over 25 years ago. This two-part blog examines the nature of subsidence, how can it be rectified and whether insurance is available to cover the costs of repair?

What is subsidence?

Subsidence is the downwards movement of a site on which a building stands, where the soil beneath the building decreases in volume causing the building’s foundations to become unstable. In contrast, heave is the upwards movement of a site caused by the expansion of the soil beneath the building’s foundations.

Soil decreases in volume when it loses moisture, making clay soil particularly vulnerable as it is made up of 30-35% water. Soil with a high clay content can become desiccated when it is low in moisture, which causes the soil to shrink in size. Clay rich soil is particularly common in the South East of England, making this area most likely to suffer with subsidence.

Prolonged dry, hot weather is one cause of subsidence, and probably the main contributor to this year’s surge of claims. Another cause, which can further worsen the situation, is excess vegetation, which absorbs the remaining moisture in the soil. Some of the worst culprits include poplar, oak and willow trees which have root networks spanning over 30 metres that can absorb more than 50,000 litres of water each year. Depending on the root networks’ position in relation to a building, the absorption and soil shrinkage can be uneven, leading eventually to the building moving in different directions.

Subsidence warning signals include cracks, often diagonal in nature and located near doors and windows, suddenly appearing rather than growing gradually. Subsidence may also cause dry wallpaper to rip or crinkle. Eventually subsidence will make a property, and its foundations, unstable.

How is subsidence rectified?

Subsidence claims are often complex involving protracted investigations and ongoing monitoring. The Financial Ombudsman Service (FOS) suggests that monitoring a site over a 12 month period is reasonable because all the seasons are covered.

In many cases the building can be stabilised by repairing leaking drains, removing vegetation including trees or providing additional strengthening.

Underpinning is often a last resort as it is the most expensive, intrusive and time consuming remedy. A recent report stated that it usually takes 24 months to resolve a subsidence claim by underpinning and that it costs in the region of £25,000-£30,000. Although, underpinning is generally accepted as the most permanent and effective way to stabilise a property, it can cause a number of problems if it’s not required or if it is undertaken extensively. Whilst policyholders usually believe that this is the only effective solution, they are advised to work with insurers and experts to ensure that the right decision for the property in question is made.

New technologies are also emerging to deal with subsidence, including ground rehydration systems and grouting injections, which serve to stabilise the soil without the underpinning.

Will your insurer cover subsidence?

Duty of Disclosure and Prompt Notification

The good news is, subsidence, as well as heave and landslip, are generally covered by buildings and contents insurance for private homes in the UK. Provided that policyholders notify their insurer as soon as they become aware of the subsidence, they should have a valid claim. It is very important to report cracks suspected of being caused by subsidence to insurers immediately so that the insurer cannot attempt to avoid the claim on the basis of delayed notification. It is also equally important to report any cracks or evidence of subsidence to the insurer on inception or renewal of a Policy as failure to do so could be a material non-disclosure, giving the insurer the ability to avoid the entire policy.

In Loyaltrend Ltd v Creechurch Dedicated Ltd [2010] EWHC 425 (Comm) material damage was caused to a fashion retail outlet in Notting Hill by reason of subsidence. A claim was initiated by the tenant of the property for business interruption losses arising out of reduced takings caused by damage to the interior of the shop. The Insurer ran a notification defence on the basis that “significant cracking” was clearly apparent in November 2003 and that the Claimant’s insurance broker should have brought this to the Insurer’s attention in November/December 2003, before policy inception. Further, the Insurer successfully argued that upon inception of the policy, the Claimant was obliged to notify the Insurer immediately of any material damage which may consequently give rise to a claim, and that the Claimant failed to do this by not giving notice until August 2005. I shall discuss the specific business interruption aspects of this case in more detail in part two.

Similarly, in Brit UW Ltd v F&B Trenchless Solutions Ltd [2015] EWHC 2237 the insurer argued that the Defendant, F&B Trenchless Solution Ltd, had failed to disclose material information prior to the conclusion of the policy. Materiality is an objective assessment and therefore the question for the court to consider was whether the Defendant’s knowledge would have influenced a prudent insurer to vary the terms of the cover if it had been disclosed at the underwriting stage. The Judge found in favour of the Insurer, that there had been a material non-disclosure and that this did induce the Insurer to offer more favourable terms as it appeared to be a good risk.

Policy Definitions and Exclusions (the small print)

Whilst many policies will provide cover for damage and/or loss caused by subsidence, they usually only cover the cost of repairing the present damage and/or loss, but do not cover the cost of preventing future or further damage or subsidence. Insurers do not tend to cover this sort of proactive, future-proofing work and, consequently the cost of this often falls on the responsible homeowner. However, making a claim for this sort of work, even if it is rejected by insurers, shows clear evidence of early notification.

The FOS has provided some useful guidance on subsidence related complaints. Common complaints include mismanaged claims, insufficient settlement proposals, poor quality repairs and rejected claims. Specifically, the FOS refers to the situation where an insurer rejects a subsidence claim on the basis that the damage and/or loss was caused by an alternative, uninsured, event e.g. settlement. Similarly to subsidence, settlement is the downward movement of a site, however, it is the result of soil being compressed by the weight of the building(s) within 10 years of construction.

Other definitions to be mindful of are “buildings” and “main residence”. Many insurers will not cover subsidence damage to parts of the property defined as “buildings” unless the “main residence” is also affected by the subsidence. In practical terms this means an insurer may avoid covering damage to patios, outbuildings, paths and swimming pools, where they alone are affected and the “main residence” is not. In reality damage to these “buildings” could be just as detrimental and costly to a policyholder as damage to the “main residence”. It is therefore sensible for policyholders to understand what their policy says on the subject.

Change of Insurance Provider

The eminently sensible Judge Mackie QC in Loyaltrend Ltd v Creechurch Dedicated Ltd [2010] EWHC 425 (Comm) drew the court’s attention to the difficulties, where there is more than one insurer during the period of damage, in determining “with whom and to what extent liability should lie”. Where a claim for subsidence repair is made close to the start of a policy, an insurer will likely argue that the subsidence, and the damage and/or loss caused by the subsidence, pre-dated the policy.

To govern this tricky situation, the Association of British Insurers published a Domestic Subsidence Agreement, which, as of December 2017, 50 insurers had signed up to. Where the claim is made during the first eight weeks of a policy, it is agreed that the previous insurer will manage the claim. Where the claim is made more than one year in to a policy, it is agreed that the incumbent insurer will manage the claim. The responsibility for claims falling within eight weeks and one year in to a policy will be shared; the claim will be accepted and managed by the insurer to be first notified, however the insurers will divide the cost of the claim. It should be noted that if the property also changes ownership during this period, that the Domestic Subsidence Agreement will not apply.

Part 2 of this blog will consider subsidence insurance claims and commercial properties in more detail.

In the meantime should you require any advice on this topic, or any other insurance related matters, please contact Nicola Maher or any member of the Edwin Coe Insurance Litigation team.

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