The risks of underinsurance
Three years ago we started working with a new partner who conducts Building Reinstatement Cost Assessments on properties. To date, we have had over 550 valuations completed on client’s properties. 64% of these properties had a level of underinsurance. Under the Insurance Act 2015, it is a policyholder’s responsibility to provide insurers fair presentation of the risk. This must include accurately telling them the rebuilding value of the property.
Not only is advising insurers the correct value of your property, part of your ‘contract’ with your insurer. If you get it wrong, it is likely to affect the payment you receive should you need to make a claim. You see, if your property is underinsured and you have a large or complete loss the insurance companies will apply ‘average’ to your claim. For example, if your property is underinsured by 25%, the amount the insurance company will pay to you on your claim will be reduced by 25%. This is the application of average.
So if underinsurance is such a risk, why are properties underinsured?
Often businesses rely on a Building Reinstatement Cost Assessment produced by their bank. Or a valuation report that has been instigated by their funding providers. Unfortunately, as many of these reports are produced predominantly from a market value perspective, the Building Reinstatement Cost Assessment often have warnings. These state the Reinstatement valuation aspect is purely an estimate as a number of assumptions have been taken. These include the use of modern materials, exclusion of demolition and professional fees. The majority of buildings are not made of modern materials and demolition costs and professional fees are critical in ensuring the correct Building sum insured if calculated.
It is also important to remember all valuations exclude VAT and if you are not VAT registered, then 20% needs to be added.
It is totally understandable that a business would expect a report instructed by the bank or funder or has been issued by a Chartered Building Surveyor would be accurate. However, from our experience, this is not the case. It is essential the report is read in its entirety to ensure the small print is not missed.
You may have had a Building Reinstatement Cost Assessment undertaken when you first purchased the property. However, it is best practice to have the valuation updated every three years. Plus post any refurbishment, renovation or extensions taking place. When did your last Building Reinstatement Cost Assessment take place?
Finally, riskily the rule of thumb is often used when looking to estimate rebuild cost. Although it may seem logical to base your valuation on similar properties and work from there. It is important to understand each property is different in respect of construction, whether Grade I or Grade II and the extent of the interior investment.
What do surveyors look for when valuing a property?
A property’s age is a factor. Buildings built before 1920 tend to have details that are more decorative. Older properties also have thicker walls and as such are more expensive to reinstate. Newer properties may have non-standard finishes requiring specialist trades to be involved in the rebuild.
Surveyors will also assess how much improvement work the building has done. If the property has been recently upgraded, it will of course be more expensive than its neighbour to rebuild. You may also have bespoke finishes, sustainability improvements or a mezzanine floor added, these all add to the reinstatement costs.
In respect of the importance of sustainability, new builds are increasingly having new factors included and having spent time with our insurers these are increasing the reinstatement costs considerably.
The location of the building will also affect its rebuild cost. If it is in a hard-to-reach / complicated-to-access location. Such as in a town centre and next to a railway line. Then this location would make demolition and rebuilding more complicated. Terraced and semi-detached properties also have the added complication that to demolish them, you have to shore up the neighbouring properties. Complication equals cost. Cost means higher Buildings sums insured.
Surveyors will also check if your property has a special status. Is it listed? Buildings are listed because they are of special architectural or historic interest. Therefore, if there’s a loss, special permission from the relevant planning authorities and agencies will be needed before rebuilding or repairs can take place. Perhaps the property is in a conservation area and there are strict rules about the material used in construction. These factors must all be considered.
Why do I need to look at the cost again?
Looking at statistics from the Government who track the changing price of building materials. You can quickly see how property values can change if they haven’t been valued in the last 3 years. Looking at the details of the Government report, which you can read here.
Pipes and fittings have seen a price increase of 17.4% in the past 12 months. Concrete blocks have increased in price by 5%. There is some good news though. Gravel and sand have gone down in price by 13% and fabricated steel is down by 10%.
It will never happen to me
The loss of one’s home or business is one of the most devastating things that can happen. Yet many people are operating under the premise that ‘it will never happen to me’. Sadly as an insurance broker with over 20 years’ experience, I know that these life-changing events do happen. So my advice would always be to check your valuation is up-to-date and that your insurance reflects the true value of your business.
Finding help?
It is important to ensure you are getting reliable and good-quality Building Reinstatement Cost Assessments. Plus make sure you read the small print. I recently encountered a client’s rebuild report, which in the small print stated it wasn’t suitable for insurance purposes. Despite our recommendation that we arrange for a Building Reinstatement Cost Assessment. The client was adamant the valuation report required by their bank was accurate. Unfortunately, when we had the opportunity to assess the small print post a claim. It stated this was only an estimate and the exclusions and assumptions that had been applied.
When looking to conduct a Building Reinstatement Cost Assessment always choose a RICS-regulated Chartered Surveyor. RICS is the Royal Institution of Chartered Surveyors. This means the professionals you choose will have to adhere to a strict code of conduct. Firms that are regulated by RICS commit to the highest professional and ethical standards.
It is also essential that if a market valuation is being completed. The surveyor is aware that the report must include a Building Reinstatement Cost Assessment, which is suitable for insurance purposes.
At Stanmore, we work with Barrett Corp Harrington (BCH). Who conduct both online Building Reinstatement Cost Assessments and will also visit your site.
If I’ve given you something to think about. Please get in touch with your Account Handler to talk about rebuild valuations. We can put you in touch with BCH and take advantage of our preferential rates.