The contractor's insurer pays “with depreciation”: why does the injured party receive less?

The flat upstairs is being renovated, and the flat below gets flooded. The contractor has liability insurance, and the injured party is reassured – then the loss adjuster announces that only the part of the wall actually damaged will be compensated, and even that with depreciation, because the paintwork is ten years old. The injured party expected the whole room to be repainted and does not understand why they are receiving less than their own home insurer would pay. This is one of the most common disputes around construction liability claims, and its root is not ill will on the insurer's part but two different legal logics. As a broker, I see that those who understand this difference are better able to decide which route to take.

Two logics: compensation and insurance benefit

Liability insurance is not the injured party's own contract. Under Section 6:470(1) of the Hungarian Civil Code (Ptk.), the insured person may require the insurer “to indemnify them, in the manner and to the extent specified in the contract, against paying compensation for damage or a grievance award that they are obliged to pay by law”, and the insurer makes the payment to the injured party (Section 6:472) – in other words, it pays as much as the contractor is liable for under the Ptk., and only within the limits of the policy (limit, deductible, exclusions). The extent of liability is determined by the law of damages: under Section 6:522(1)–(2) of the Ptk., the party causing the damage compensates the full loss, which consists of the loss in value of the assets, the lost financial benefit and the costs necessary to eliminate the detriment; under subsection (3), compensation must be reduced by any financial benefit arising from the damage. This is where depreciation comes from: the value of ten-year-old paintwork at the time of the loss is not that of new paintwork, and compensation may not put the injured party in a better position than before the loss. Home insurance, by contrast, is one's own contract: the insurer pays what the policy conditions undertake as an insured event and as a benefit – for building damage, Hungarian policy conditions often pay at new value, which is why the MNB recommends insuring the property for its reinstatement value. In both cases, the insurer pays only for what is an insured event under its contract.

The disputed case up close

In a case described on an insurance expert forum, the injured party's ceiling collapsed and two of their walls and their parquet floor were soaked because of the renovation of the flat above; the loss adjuster of the contractor's liability insurer offered to cover only the damaged part, and with depreciation, while the injured party had heard that the condominium's insurance would pay for the full repainting. The answer offered two lessons. First, condominium insurance is not an alternative: Hungarian condominium policy conditions typically exclude damage arising in a part of the building under construction or renovation, and they may also take the depreciation of the building into account. Second, the “necessary cost” is also part of the loss: under the policy condition cited, if the ceiling of a room and one side wall of identical finish, or two side walls with the same paintwork, are damaged, restoration of the entire room is due. This logic can also be argued for a liability claim – if restoration is technically possible only by repainting the whole surface, that is a necessary cost under Section 6:522(2)(c) of the Ptk. – but it is the insurer's position and the evidence that decide, not the injured party's expectations. The same applies to the liability section of CAR: it too pays compensation, not new value.

What happens to the difference?

What the liability insurer does not pay – the deductible, the part above the limit, an excluded type of loss – remains with the contractor who caused the damage, if it is due to the injured party under the Ptk. With depreciation this is not automatic: if, according to the court, the loss really is only the value at the time of the loss, the “new for old” difference cannot be claimed from the contractor either; if, however, the justified cost of restoration is higher, the difference can be claimed from the party that caused the damage, and the contractor pays it out of its own pocket. The injured party also has another route: their own home insurance, if the event that caused the damage (water ingress, escape of water from pipes) is insured under it – in that case they receive compensation under their own policy conditions, often at new value, and the insurer then enforces its recourse claim under Section 6:468 of the Ptk. against the party that caused the damage. Which of the two routes is worthwhile depends on the wording of the two contracts. And the lesson for the contractor: liability insurance does not “cover everything” – the difference, the deductible and the part above the limit remain with the company – so it is worth checking, before taking out the policy, what limit and which clauses suit the activity.

What should the injured party do – and what should the contractor do?

• As the injured party, report the loss to the contractor's insurer (ask the contractor for the policy number) and to your own home insurer as well, and document it with photos and in writing – the loss documentation checklist is there for this. Ask the insurer to set out its position in writing, including the extent of and the reason for the depreciation.
• If you dispute it, first file a complaint with the insurer; if that is unsuccessful, you can turn to the Financial Arbitration Board (PBT) or to the courts. The MNB does not decide individual claim disputes.
• As the contractor, do not admit liability or reach a settlement without the insurer's knowledge – Hungarian liability insurance conditions typically make this subject to the insurer's consent. Report the claim on the insurer's claims line; if the case gets stuck or disputed, I help as a broker where I can – representation and arguing the case are not my role.
• In a claim, it is also worth knowing the reasons for rejection, so that nothing comes as a surprise – these are collected in the article on common reasons for rejection.

Before the next loss comes

Much of the dispute stems from the lack of a condition survey before work starts and from not knowing the contracts. As a contractor, photograph the neighbouring rooms before the work, and check what your policy undertakes regarding the method of compensation for property damage. As an injured party, know what your own home insurance covers, because in a dispute it may be the other route. If you need help with these contracts, I prepare the comparison of the policy conditions and the wording of the questions – enforcing the claim, however, remains a matter of the legal relationship between the injured party and the party that caused the damage.

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Sources

• Act V of 2013 – Hungarian Civil Code (Ptk.), Sections 6:468, 6:470, 6:472, 6:519, 6:522
• CLB expert answer: Claims settlement under the contractor's liability insurance or the condominium's home insurance
• MNB Financial Navigator (Pénzügyi Navigátor): Home insurance (sum insured, underinsurance)
• Financial Arbitration Board (Pénzügyi Békéltető Testület, PBT – MNB)
• Insura: Flooded by the upstairs neighbour – whose insurer pays?
• Generali – Claims settlement information (quoting the Ptk. rules on liability insurance: Section 6:470(1), Section 6:472(1))

Related articles

• The liability section: loss to third parties
• Renovation through the owner's eyes: what to do
• Stalled or disputed claim: when the broker steps in