Many will have breathed a sigh a relief that the British government was able to reach a deal with the EU on Christmas Eve 2020 after months of negotiations. Whilst a deal of sorts has been reached, which avoids the imposition of tariffs and quotas on goods being traded between the UK and the EU, a lot of uncertainty remains in many areas. Particularly for service companies, including insurers.
The cost of materials and household contents
Those dealing with escape of water claims will be aware that the value and complexity of such claims was already increasing before Brexit. This is largely as a result of more expensive materials being used in the construction of properties, as well as the contents in those properties being more numerous and sophisticated. Therefore, more valuable and expensive to replace. This will only increase following the UK’s departure from the EU, as a result of the additional layers of bureaucracy required to bring goods into the UK from the EU. This will raise the cost of building materials, almost two thirds of which are imported from the EU, and the value of homeowners’ contents, leading to an inflation in claims costs.
Another factor that was contributing to the increasing costs of escape of water claims is said to be material defects caused by manufacturing faults, particularly with parts imported from the Far East. The increased paperwork and checks on goods passing between the UK and EU may encourage companies, at least initially, to decide to purchase plumbing parts from outside the EU to avoid this administrative burden. This could lead to the increased use of potentially defective parts in UK properties and in turn, increase the risk of a growth in escape of water claims in the future.
A further factor which could drive up the cost of escape of water claims is likely to be from the impact of qualifications of employees such as plumbers and those employed in the construction sector from the EU, not being automatically recognised. This means that it may be necessary for those affected to apply to the UK for their qualifications to be accepted, causing further delay in the resolution of escape of water claims, and increasing the costs to insurers. This will ultimately be passed onto consumers in the form of higher insurance premiums.
Impact across the UK and Ireland
It is important to note that the implications of Brexit mentioned above will not have the same effect on claims in Northern Ireland, due to the Northern Ireland protocol entered into with the EU as part of the Withdrawal Agreement. The practical effect of the protocol is to keep Northern Ireland in the Single Market for goods and for it to apply EU customs rules at its ports. This means that goods arriving from Great Britain will be checked and controlled at Northern Ireland’s ports from 1 January 2021. Goods going into Ireland and the wider EU will face no new checks or controls at the port. As a result of the protocol, Northern Ireland firms and business may have an advantage over those in England, Scotland and Wales in certain situations, as they will not face the new paperwork, certifications and checks, which will be required by companies in Great Britain. However, checks will still be needed on goods moving between Great Britain and Northern Ireland due to the ‘regulatory’ border, that will now exist and this is likely to increase costs.
In terms of the potential impact in Ireland itself, any impact is thought to be from the fact that the deal reached between the UK and the EU did not cover services. This could affect the costs of providing insurance in Ireland due to UK insurers no longer having automatic passporting rights with the EU. This could lead to insurers leaving the Irish market. However, the perceived view is that this scenario is unlikely given the size of the EU market and the fact that many insurers have already set up offices in the EU to circumvent this issue.
It is clear that in general terms the uncertainty surrounding the UK’s exit from the EU is likely, for now, to increase the cost of escape of water claims faced by insurers, both as a result of the ‘red tape’ faced by British companies when purchasing goods and materials to resolve those claims and the added complexities that may be faced by the workforce effecting those repairs.
Why does the impact of Brexit matter and what can insurers do about it?
If the insured is liable for the escape of water then insurers will need to acknowledge that the costs of such claims will increase and ensure that their liability claims handlers are aware of this trend in order to settle claims on a realistic basis. At the same time, insurers still need to check that the loss was adequately mitigated; arguments that the materials could have been procured more swiftly/cheaply from the EU if the claimant had spent the necessary time in completing the additional paperwork could become common.
When responding to claims where their insured has sustained damage from an escape of water, insurers will want to ensure that their remedial contractors have made the necessary provisions to meet the changes so as to minimise the costs of remedial works both to reduce the initial pay out and to maximise any opportunity for recovery. Adequacy of insurance could also become very important, especially if customers have renewed policies over several years without considering whether the value of their goods has changed.
How can BLM help?
Whilst the effects of Brexit will reduce as time goes on and companies become familiar with the new procedures, it will be necessary to negotiate these waters in the interim. BLM, with its teams of lawyers across the UK and Ireland, is well placed to advise insurers on how Brexit will affect claims in their respective jurisdictions as well as their future interaction with the EU.