Belinda Smith, Broking and Placement Director for Northern Region of PIB Insurance Brokers looks at the issue of buildings underinsurance and how to avoid it.
A recent report by Rebuild Cost Assessment Ltd, a Royal Institute of Chartered Surveyors (RICS) regulated property valuation company, highlighted that as many as 9 out of 10 properties in the UK are insured for the wrong amount of which the vast majority (79%) are underinsured*.
Increased labour and building material costs brought about by both the Pandemic and Brexit during the past 12 months have further exacerbated the situation making it now more important than ever to review building sums insured to ensure they are adequate to reflect the total reinstatement cost of a property in the event of a total loss.
Why is it important to set the correct building sum insured?
Whilst over insuring a property means paying too much for buildings insurance cover, insuring a property for an amount that is not adequate to rebuild it in the event of a total loss could have severe consequences for a business.
If a property is found to be underinsured following a damage claim, insurers could reduce the value of the claims settlement proportionately in line with the amount of underinsurance – this is known as the application of Average.
However, in a worst-case scenario, under the Insurance Act 2015 an Insurer may consider that the declared rebuilding sum insured represented a deliberate or reckless breach of a policyholder’s duty and would therefore be within their rights to decline the claim and void the policy with no return of premium.
It is therefore vital that a building sum insured is set correctly to minimise the risk to a business in the event of a claim being made.
Common Causes of buildings underinsurance
In addition to the more recent impact of Brexit and the pandemic on rebuilding costs, in our experience common causes of buildings underinsurance include:
- The building sum insured has been mistakenly based on the market value of a property, or a mortgage valuation. For insurance purposes the building sum insured needs to reflect the full cost of reinstating it following a total loss
- The building sum insured is based only on the cost to rebuild the main building structure and does not account for items such as foundations, boundary walls, outbuildings, drains, driveways, and car parks which all fall within the definition of buildings under an insurance policy
- The building sum insured does not factor in the additional costs involved in rebuilding the property including site clearance and demolition as well as costly architects and surveyors’ fees involved in the rebuilding process
- Features specific to a building such as listed status or period features have not been factored into the rebuilding cost
- A property has been altered or extended but the sums insured have not been subsequently reviewed
- A building has never been professionally valued for insurance purposes or the valuation has not been reviewed in the past three years
- VAT has been omitted completely or applied incorrectly
How to avoid underinsurance
A buildings Sums insured should be reviewed annually to ensure it adequately reflects any alterations, improvements or replacements that have occurred during the year as well as the factors listed above. It is not sufficient to rely purely on index linking that may be applied to some policies at renewal as a substitute for thorough annual reviews and regular professional valuations.
Additionally, if a professional valuation has never been undertaken or more than three years have elapsed since this was last reviewed, a rebuilding cost assessment by a RICS (Royal Institution of Chartered Surveyors) qualified surveyor is the most reliable way to ensure a property is adequately insured and to minimise the risk of underinsurance to a business.
Chamber Patron Members, PIB Insurance Brokers, have partnered with Royal Institute of Chartered Surveyors (RICS) accredited specialist companies who offer rebuild costs assessment options to suit your business needs. For further information please get in touch, via the Chamber, click HERE:
