Often, the first time a property owner is aware they have a problem with underinsurance is when they want to make a claim. This sets off a chain of events that no one wants – least of all you as the landlord or freeholder.
Nearly all outcomes resulting from underinsurance have a financial impact on you as the policyholder.
Valuations – Some Issues
Market Value vs Reinstatement Costs
Market value is a very poor indicator of rebuilding costs and one of the most common reasons for discrepancies in insurance valuations.
In many instances you are going to end up paying more premium than you need to if you insure on the basis of market value.
In the relatively depressed market that prevails today, market values may, on occasion, be less than rebuilding costs. But even in a buoyant market other issues need to be considered.
For example, costs incurred during the original construction, such as decontamination clearance or earthworks, are unlikely to need repeating in the rebuilding of a property.
Tender Price Index (TPI)
Especially in the commercial property sector, TPI is often used to add to base figures to accommodate annual inflation costs on properties. However, the index will not accurately reflect changes in building regulations or local market variations.
Building Costs Creep
Applying to private and commercial properties and particularly prevalent in recessionary times is the issue of low tendering by builders that creep upwards through the building process. It is the final cost that more accurately reflects the potential reinstatement costs.
Property owners may want or be compelled to rebuild with environmental improvements that were not in the original building or add additional features such as solar panels. Strictly speaking, reinstatement will only provide for replacement of the original specification.
Consequences of underinsurance
Essentially there are three outcomes when underinsurance is discovered:
1 – Premium & terms correction – policyholders may have to ‘make good’ the premium that the insurer didn’t receive as a result of the sum insured being too low. Additional terms may also be applied retrospectively, such as the policy excess being increased.
2 – Proportional reduction in settlement – often described as ‘average’ a claim settlement may be reduced in line with the level of underinsurance. For example if a property insured for £150,000 actually costs £300,000 to rebuild the property is only insured for half the sum it should be. The claim in this instance will be settled on the same basis – 50% of the original sum insured. In this example the settlement would only be £75,000.
3 – Total repudiation – in cases where the underinsurance is proved to be wilful or deliberate the policy may be considered null and void and the claim may not be met at all.
The best way for landlords and freeholders to ensure sums insured are adequate is to introduce a system of regular re-valuations. This need not be onerous and there is plenty of independent advice to ensure that you have the correct sum insured.
The Association of British Insurers has produced, in association with the Royal Institute of Chartered Surveyors, the Building Costs Information Service (BCIS). This website provides general guidance on the rebuilding costs of houses and some types of flats, as well as a free online calculator to help policyholders check the adequacy of their sum insured. Commercial property, which is far more complex, is also catered for with a selection of subscription services.
For further information about the risk management and insurance options available to you please call NetRent Insurance Services on 01352 721300 or email email@example.com