Repair, Replace or Cash?

Most household policies now provide "new-for-old" cover but leave it to the insurer (not the policyholder) to decide whether the claim should be settled by repair, replacement, reinstatement or cash settlement. The Financial Ombudsman Service (the FOS) takes the view that the insurer must exercise this power reasonably, in the circumstances of the individual case. This has a number of implications for both parties.

Where insurers opt for repair, the FOS considers that they have a duty to explain the implications of any choices made by either party. If the repairer is chosen by the insurer – or its agents (such as loss adjusters) – then it is normally the insurer who will be liable to make good any deficiencies in the repair.

Where a policyholder insists on a particular repairer carrying out the work, then it is the policyholder who will generally be responsible for the quality of the work. This does not mean that every repairer who has provided a claimant with an estimate will be regarded as the claimant’s chosen contractor. The FOS has considered complaints where the insurer told the policyholder to obtain estimates and the policyholder sought the loss adjuster’s assistance in doing so. In these circumstances, the FOS has concluded that the insurer, rather than the policyholder, was liable for the repairer’s shortcomings.

Even if the policyholder chose the repairer entirely independently, the insurer will be responsible for rectifying deficiencies in the work if it or its agents "controlled" the repairer, for example by requiring the repairer to cut his costs or to use certain materials or parts. In those circumstances, the repairer can no longer be regarded as the policyholder’s agent.

Opting for "replacement" is only a reasonable option on the insurer’s part if the object claimed for can be replaced. If the object is antique jewellery, for example, then it is not open to the insurer to insist the claimant buys a modern replacement from a chain shop. Similar issues arise whenever the replacement options are limited. It may, for example, be unreasonable to limit a policyholder’s choice of replacement to a particular retailer.

Policyholders should be allowed to choose where they purchase a replacement and they are entitled to a cash settlement if they cannot find an acceptable alternative. In such circumstances, the FOS would not regard it as reasonable for the insurer to make a deduction from the cash settlement to represent any discount it would have got if the policyholder had bought a replacement from one of the insurer’s nominated suppliers. Nor would it necessarily be appropriate for the insurer to offer vouchers to the policyholder. If the option of replacement is not available, then the only way in which the insurer can indemnify a claimant is by a cash settlement.

In some cases, policyholders may not wish to purchase a replacement for the damaged or stolen goods. This may be, for example, because their circumstances have changed, or the object had sentimental value. Where this is the case, the FOS will normally ask the insurer to agree a cash settlement.