The risks of underinsurance
We are pleased to work with a partner who conducts Building Reinstatement Cost Assessments on properties. Out of 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 with a 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.
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?
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?
Government statistics show that the cost of building materials can change significantly over relatively short periods. Pipes and fittings, concrete blocks, and other materials have all experienced notable increases in recent years, while some materials such as gravel, sand, and fabricated steel have seen price reductions. These shifts highlight the importance of regularly reviewing property valuations to reflect current construction costs.
It will never happen to me
The loss of a home or business is one of the most devastating events a person can face. Yet many operate under the assumption that “it will never happen to me.” Life-changing events like this do occur, which is why it is essential to ensure your property or business valuation is up to date and that your insurance reflects its true value.
Finding help?
Ensuring you have a reliable Building Reinstatement Cost Assessment is essential, and always check the small print. Some reports, while seemingly sufficient, may not be suitable for insurance purposes, leaving businesses exposed when a claim arises.
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 offer both online assessments and on-site visits. If you’d like to review your rebuild valuation, contact your Account Handler to discuss options and take advantage of our preferential rates.