Part of the roof structure has burnt down, or a burst pipe has flooded the stairwell; the loss assessment has taken place, the insurer has transferred the money – and the common representative sees that the amount is less than the contractor's quote. And in the covering letter there is one sentence: the insurer pays the difference once reinstatement has been proven. As a broker, I see that many buildings do not take this sentence seriously: the money is in the account, and the general meeting starts talking about other things – the lift, the gate, reserves. Yet at this point part of the payment does not belong to the building yet – it can only become the building's. This article shows why payment for building damage comes in two stages, what this means for decision-making in a condominium, and how to keep the difference from being lost. The stages of claim settlement are covered in the article on loss assessment, and the deduction of depreciation and the deductible in the article on payments lower than the invoice – the subject here is the relationship between reinstatement and new value.
- Hungarian building insurance conditions typically pay in two stages: first the time-of-loss (depreciated) value, and the difference missing up to new value only if the building proves the reinstatement with invoices within the deadline set in the policy conditions – the details vary from insurer to insurer.
- In a condominium, the claim payment is the community's money: the general meeting decides how it is used, but if the meeting spends it on something else or keeps postponing the repairs, the difference is lost for good, and the unrepaired damage also backfires at the next claim.
- The invoices, the bank's statement and the general meeting timetable together decide whether the building receives the whole payment – so it is worth managing the claim settlement and the renovation decision in a single calendar.
Why does the insurer pay in two stages?
Most building insurance policies are written on a new-value basis: the sum insured is set according to the cost of rebuilding, not the market price – the article on rebuilding value explains the difference. On the day of the loss, however, the roof, the plaster or the riser pipe was not new: the insurer's inspection establishes the time-of-loss, depreciated value of the damaged structure, and Hungarian policy conditions typically pay this in the first round. The difference between new value and time-of-loss value is payable if the building actually repairs or rebuilds the damaged part and proves this with invoices within the deadline set in the policy conditions. The deadline and the method of proof vary from insurer to insurer, so they have to be looked up in the building's own policy conditions; behind this lies the logic of the property insurance rules of the Hungarian Civil Code (Ptk.): insurance replaces the loss and cannot be a source of enrichment – the Code expressly permits reinstatement insurance on a new-value basis, and policy conditions tie the payment of the difference to proof of reinstatement so that payment at new value does not lead to enrichment.
Several policy wordings contain further limits: for a building part that is heavily worn – beyond the degree set in the policy conditions – only the time-of-loss value is payable in the first place; if the reinstatement takes place at a different location or for a different purpose, the difference may not be paid; and in the case of partial reinstatement, the difference is typically paid only in proportion to the items proven. On documents, for example, one Hungarian set of condominium insurance conditions provides that the insurer may request the invoice proving the cost of reinstatement, the quote and cost estimate, and the invoice issued after these have been accepted, and, for larger works, reinstatement plans, contractor's declarations and proof of payment. The invoice must relate to the building and reflect the items of the cost estimate accepted by the insurer – if in the meantime the building extends or builds something else, that does not count as reinstatement for the purposes of the difference.
The general meeting decides – but not freely
On the building's policy, the policyholder is the condominium and the insured persons are the co-owners; payment for damage to common property arrives in the building's account, as the article on who receives the claim payment explains in detail. The money therefore belongs to the community, and the general meeting decides how it is used. The freedom of that decision, however, is limited from three sides. Legally: under Section 43 (1) of the Condominium Act (Tht.), the common representative is obliged to take every necessary measure to ensure the upkeep of the building – an unrepaired roof or riser pipe is not a state in which the building can remain for long, and it also raises questions of liability towards the residents. In insurance terms: if the general meeting spends the payment on something else or keeps postponing the repairs, the difference is lost for good when the deadline expires, and the building is forced to carry out the repairs later, at higher cost, out of the depreciated value. Thirdly: unrepaired damage backfires at the next claim – policy conditions may exclude damage that recurs from the same cause or treat it as grounds for the insurer being released from paying, and several policy wordings state that cover for damage that already exists only starts once the original damage has been repaired.
In practice the difficulty is not the intention but the time. A general meeting has to be convened, quotes requested, a contractor chosen, possibly a permit obtained, and construction work depends on the season. Meanwhile, the deadline in the policy conditions keeps running. That is why it is worth managing the claim settlement and the renovation decision in a single calendar: recording in the resolution the subject of the reinstatement, the accepted cost estimate, and the authorisation for the construction contract and for settling accounts with the insurer. If it becomes clear that the works will slip beyond the deadline, it is worth asking the insurer for an extension in writing before the deadline expires – whether to grant it is the insurer's decision, but a request made after the deadline typically no longer helps.
Common and separate property: who is entitled to the difference?
A roof leak rarely stops at the common parts: besides the stairwell, the ceiling and parquet of the top-floor flat are damaged too. The reinstatement of the common-property part and the difference that goes with it belong to the building; the repair of the separately owned part inside the flat is the owner's, and the difference is likewise paid on the basis of the owner's invoice – depending on the policy conditions and the building's statement, the insurer pays the owner's share either to the building or directly to the owner. The common representative's job in such cases is to split the insurer's settlement item by item: what is the common part, what is the flat, and which invoice belongs to which item. If this is not done, it can happen that the building is waiting for the difference on the flat's reinstatement while the owner is waiting for the one on the building's – and the deadline is running for both.
A bank on the policy: the effect of the clause and the assignment
If the building has taken out a loan and the bank appears on the policy as mortgagee, or the insurance claim has been assigned to it, the insurer asks for the bank's statement before paying out – the policy conditions already quoted expressly list the financial institution's mortgagee statement and the bank's waiver statement among the documents that may be requested. Banks typically allow the payment to go to the building's account if it is used for reinstatement and the building supports this with the construction contract and cost estimate; if the building does not reinstate, the bank may apply the amount to reducing the debt – this varies by loan agreement. Reinstatement therefore matters twice over here: the difference depends on it at the insurer, and the use of the money depends on it at the bank. The article on renovation loans covers the bank's requirements in detail.
What should the common representative do once the payment arrives?
- Read the insurer's settlement statement and the benefits section of the policy conditions: how much is the time-of-loss payment, how much is the withheld difference, what is the deadline and what proof does the insurer require?
- Take the reinstatement cost estimate and the deadline to the general meeting together with the claim settlement; the resolution should cover the reinstatement, the construction contract and settling accounts with the insurer.
- The construction contract and the invoices should be in the building's name and follow the items of the accepted cost estimate; keep the invoices, the technical handover record and the photos in the building's records.
- If the policy carries a bank clause, request the bank's statement in good time; the loan agreement shows what the bank expects regarding the use of the money.
- If the works are delayed, ask the insurer for an extension in writing before the deadline.
The reinstatement and the general meeting's decision remain the building's business; keeping the proofs in order and following up the settlement are the common representative's. If you get in touch with me about the claim settlement or the difference, I will help where I can.
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Sources
- Colonnade ATLASZ Társasház Biztosítás (condominium insurance) – policy conditions and customer information (230807): 2.1.8, 7.2.1, 10.A.e (documents required for reporting a claim), 10.A.f, 10.B.b
- Condominium Act (Tht.) Section 43 (1) (Act CXXXIII of 2003 on condominiums) – Nemzeti Jogszabálytár (National Legislation Database)
- Property insurance rules of the Hungarian Civil Code (Ptk.) (Act V of 2013, Book Six, insurance contract) – Nemzeti Jogszabálytár (National Legislation Database)
Related articles
- Loss adjustment and settlement: what happens after the report?
- Rebuild value vs. market price: why they are not the same
- Why is the claim payment lower than the invoice? Depreciation, deductible and what can be reclaimed from the person who caused the damage
- Who does the insurer pay compensation to: the building or the resident who suffered the loss?
