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Ombudsman weighs in on landslip, leaky water pipes and subsidence

16 July 2020 Gareth Stokes

Short-term insurance brokers should assist their clients in understanding how their personal lines buildings / homeowners cover is expected to perform for landslip, subsidence, and related perils. It makes sense to regularly review the policy wordings from your various insurance partners and ensure that each of your clients is informed of how such perils are dealt with, and whether any exclusions apply. There are many potential pitfalls in this area of cover, as evidenced by a case study published in the second edition of the Ombudsman’s Briefcase, 2020. The Briefcase is published by the Office of the Short-term Insurance Ombudsman (OSTI) to inform consumers of various developments in complaints resolution.

The case of the burst pipe

The complainant in this case, referred to throughout as Mr S, experienced extensive damage to his property due to subsistence that was allegedly caused by a burst pipe. He brought a complaint to the Ombudsman after his insurer rejected the claim on the basis that the damage was due to the gradual movement of the clay subsoil beneath the house. Such disputes require that the insured ‘prove’ that the complaint relates to damage caused by a peril that is on cover on the policy; the insurer must bring evidence to support its reason for rejecting the claim. 

“The policy provided cover for loss or damage to the buildings caused by burst water pipes or water tanks,” writes the Ombudsman, which was in line with Mr S’ contention that the burst pipe was the insured peril that had caused the damage. An aside, and something we found strange when reviewing this case, was that this water pipe had been allowed to leak for a period of around 10 months. Anyone not making regular checks of their water infrastructure, by doing frequently reading their water meters, opens themselves up to the risk of significant structural damage; not to mention huge spikes in their water bills. 

Mr S handed the Ombudsman a copy of an engineering report that supported that the burst pipe and subsequent leak had resulted in his foundations subsiding, with consequent damage to the buildings floors, ceilings, and walls. According to the engineers: “The cracks in the property were a direct consequence of the formation and disintegration of a weakened honeycomb-like soil structure in the gravel … water from the burst pipe caused the honeycomb-like soil structure to disintegrate and collapse and the foundation to subside”. You get the picture! 

Relying on policy wordings

The insurer, which introduced an engineer’s report in support of its position, also turned to its policy wordings on subsidence. We reproduce the section of the policy wording that was included in the Ombudsman’s case study. Under the sub-heading ‘Subsidence or landslip – limited cover” the wordings stated: “We cover loss of or damage to your buildings caused by subsidence or landslip or both. However, we do not cover loss or damage (b) caused or made worse by the contraction or expansion of soil due to its moisture or water content, as experienced in clay and similar soil types or (f) caused or made worse by normal settlement, shrinkage, or expansion of the building. If we require it, you must prove that the loss or damage you claim for was caused by subsidence or landslip”. In the Ombudsman’s view the insured had fulfilled his obligation to prove that the damage was caused by subsidence. 

The insurer, through its engineering firm, disputed these findings. They observed that the floors in the lounge and kitchen had cracked due to the absence of expansion joints and the movement of clay subsoil upon which the property was constructed; that the cracks occurred over a period of time and were not sudden; and that there was no evidence of resultant damage caused by a burst pipe, among other points. The insurer’s engineer was also concerned that the damage had evidenced only five months after the pipe had been repaired. 

The Ombudsman weighs in

It was left to the Ombudsman to play engineers’ advocate. “We had to investigate the differences of opinion from the two engineering firms,” they write. The debate centred on technical issues such as which engineer had used the correct method to determine the soil’s “swell potential” and whether the engineer’s had correctly defined terms such as ‘settlement’ and ‘subsidence’. The insurer’s engineer defined settlement as “the gradual downward and / or sideways movement of ground resulting from stress and imposed loadings exceeding the available strength of the ground”. Subsidence was described as “the sudden downward movement of the ground on which the insured property is located, due to causes unconnected to the buildings”. 

The insured’s engineer countered by introducing sub-definitions for settlement, being consolidation settlement, which is the “vertical displacement of the soil surface associated with the gradual reduction in volume of a saturated soil of low permeability due to a change in effective stress” and collapse settlement, which refers to “any additional settlement occurring due to wetting up of a partially saturated soil with a collapsible fabric”. From the notes it appears this case devolved into a “we say, they say” technical battle; but we must remember the Ombudsman is simply recounting sections from each engineer’s report. 

The Ombudsman based its decision on which of the engineering firms versions of events were more reliable, on a balance of probabilities. “We concluded that Mr S adequately demonstrated that the damage was directly caused by water from the burst pipe,” writes the OSTI. “Although the insurer questioned the findings submitted by Mr S and his engineering firm, it did not actively do anything to refute these findings”. The OSTI found that the damage caused to the property did not fall within any exclusions listed in the policy and that the insurer had “not provided sufficient evidence to prove the exclusion on which it relied to reject the claim”. The insurer acceded to the Ombudsman’s recommendation that the claim be settled. 

Writer’s thoughts:
Anyone interested in the application of terms such as settlement and subsidence in the personal lines insurance world should visit the OSTI website and download a copy of the Q2 2020 Ombudsman’s Briefcase. We were struck by two issues while reading this complaint summary. The first, is how long it takes to resolve even the simplest insurance dispute; and the second, is the potential cost to the policyholder of proving or disproving certain positions. Have you been involved in a matter where you needed experts to support a claim or Ombudsman complaint? If so, how did your clients fund the battle? Please comment below, interact with us on Twitter at @fanews_online or email me us your thoughts [email protected]. .

Comments

Added by Gareth, 29 Jul 2020
Thanks for your thoughts, Aloma. There are some nuances to OSTI cases that should be considered, most notably their focus on principles of fairness and equity, which may stray from purely contractual interpretations.

On my initial reading of the case summary I believed the insurer would not indemnify the damage, as the subsidence was due to the water leak, which was not a natural cause. But the OSTI assessed it differently.
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Added by Gareth, 29 Jul 2020
To Athol: Indeed, much can be said about the continued reliance by insurers on technical wordings, especially in the personal lines world.

There have been some interesting developments over the weekend of 25-26 July with regards CBI. Seems the insurers you mention are either making interim relief payments or going ahead and negotiating claims settlements.
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Added by Gareth, 29 Jul 2020
This response directed at Arrie. Thanks for your comment; we agree that insurers have a long way to go in converting their policy wordings to plain English. And even when they do this there are many clauses that can be subjectively interpreted. As evidenced by the OSTI case study it ends up being a battle between two engineers, each capable of presenting data in support of the client or insurer, as the case may be.
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Added by Gareth, 29 Jul 2020
Interesting observation Erik. The insurers seem happy to pay for a range of perils; but the minute they deal with cracks in structures there are dozens of additional hurdles to clear. As for human settlements on suitable ground, that opens up another massive debate. Ask anyone who has built their house in dolomite areas. Sometimes it takes decades before the real risk emerges.
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Added by ALOMA NOLAN, 20 Jul 2020
I find the above claims outcome to be questionable as subsidence and landslide cover is not a resulting damage caused by water loss caused by leaking pipes or pools. This cover is for Nature cause related issues.
"If the ground surface shifts downward, it is called subsidence. A particularly common cause of subsidence is the movement of groundwater. ... In a natural example of groundwater-related subsidence, the erosion of bedrock due to moving groundwater can cause cave-ins, which are an extreme case of subsidence."

This claim was not for subsidence but instead was for the Leaking of pipe which indeed is covered, I am just not sure for how much as this would normally be "limited amount covered" under the building section as specified on the insured's schedule. Usually around R5000.
Another question here is was this a storm water pipe, the client would not have noticed a leak, as there is no water bill for storm water only for water supply into the property from the municipality.
The cracks in the foundation of the house is clearly a resulting damage.

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Added by Athol Smith, 17 Jul 2020
Insurers love placing reliance on semantics and confusing technical jargon. Look no further than the current dispute involving Santam , Bryte, Guardrisk, etc on the CBI claims.
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Added by Arrie Schoeman, 16 Jul 2020
This is indeed a grey area and the clients does not always have the means to afford a engineer. It is far to easy for the insurer to use certain clauses to suit themselves and get out of jail card not to pay claims. Their famous policy wording lines to decline claims are "clay ground and the expansion of same" or "happened over a period of time".
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Added by Eric, 16 Jul 2020
What is sad and unfair is that clause?

When an area is allocated residential zoning, surely specialists engineering and others had to make sure the are can handle houses. The house itself has to have foundations according to regulation and an engineer signs this off ...

The wind can totally remove your your house - insurers pays - your house can be swallowed insurer pays - a tree falls and damages the house - insurer pays - BUT

But insurers come with their crap regarding the movement of clay, that is total BS.
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