Do banks and insurers operate in cahoots with each other?

Insurance Helpline with Cedric Stephens

Question: In August 2009 I took out an emergency bank loan on my home. I was due to undergo heart surgery in the United States. I had to buy perils insurance. In order to do so, the property had to be valued. The bank recommended the valuator and insurer. The house was 3,155 square feet. The market value of the property was assessed at $25 million. Its replacement cost was estimated at $26 million. I paid $51,000 for the valuation. The insurance premium was $104,000. My loan was five per cent of the market value, or $1.25 million. After signing the loan agreement and the funds were disbursed, I found out from a local valuator that properties like mine in the same area were priced between $14 and 16 million. I have not received the policy or a confirmation letter as yet. The bank has been of no help whatsoever. All they are saying is "Didn't they send you one?" The 2010-11 premium is $119,000. Does the bank have the right to force borrowers to take out unnecessary property insurance, or just adequate insurance to cover their liability? In the past I have insured my home for $12 million. The bank and the insurer appear to be taking advantage of customers like me.

- K.K., St Elizabeth

Answer: Are the commercial banks and insurance companies colluding with each other? This is a most intriguing question. Here is some information that you can use to support your theory. 1) banks are now on Finance Minister Audley Shaw's radarscope. Their profits are much higher than what overseas banks earn. 2) Another newspaper reported last week that "banks in Jamaica ranked the worst for lending and saving among Caribbean nations". This was one finding from a survey conducted by The World Bank. 3) Some banks and insurance companies in the Jamaican market have the same owners. 4) When the Insurance Act was being drafted nearly 10 years ago, it had a clause that prevented lenders from using their financial muscle to influence borrowers' insurance-buying decisions. Law makers were quietly lobbied to drop that provision. Though these facts are pertinent, they are not the cause of your problem.

Contractually obliged

He who pays the piper calls the tune. In the real world of loan agreements and insurance contracts, it is the lenders and the insurers - to use the language on the streets and mix the metaphor - who call the shots. Check Audley Shaw or ex-Finance Minister Omar Davies in relation to the International Monetary Fund, in case you believe that I have overstated the power that lenders have. Loan agreements (like insurance contracts) are written mainly to protect the interests of the banks. Without looking at the agreement that you signed, I am very sure that you are contractually obliged "to insure and keep insured" the house on your premises that was pledged as security for the loan. Were you to refuse to pay the premium, the bank would pay it under the terms of the loan agreement, add it to your loan balance, and charge you interest on that amount. Similarly, if you defaulted on the loan, the bank would have the right to sell your property to repay the loan.

There is nothing that you can do at this stage to escape the loan conditions - short of repaying the bank.

Can you prove that the new replacement value of the house is substantially less than the $26 million that the bank-recommended valuator estimated? I recently wrote an article headlined: 'Estimating Home-Insurance Costs - a Job for Experts, not Novices.' A reader, Errol Spence, provided the following information which may be of some use in solving your problem. He wrote "... (There are) several professionals in the building industry who can provide accurate estimates of the replacement costs for insurance purposes of not only houses, but all types of structures. Professionally qualified architects and engineers can provide the service, but the more appropriate professional is the quantity surveyor, one of whose specialties is in the area of construction costs. A listing of recognised quantity surveyors can be obtained from the Jamaica Institute of Quantity Surveyors." (http://www.jiqs.com/Members.aspx).

Negotiate

If a recognised professional were to determine in writing that the $26 million new replacement value was too high, you could negotiate a reduction in the sum insured and premium, backdated to last year. You would also have grounds for filing a written complaint against the loan officer at the bank. On the other hand, if the result of a second written valuation was that the new replacement value was more than $26 million, you would not have a leg to stand on.

Given the ways in which banks and insurance companies operate, one should be very careful when entering into contracts with them. Their main goal, in spite of all their lofty-sounding mission statements, is to maximise profit. Small borrowers are at distinct disadvantage.

Cedric E. Stephens provides independent information and advice about the management of risks and insurance. If you need free information or counsel to help you solve a problem, write to The Business Editor or contact Mr Stephens directly at aegis@cwjamaica.com. You can also send him a text (SMS) message at 812-7233.