INSURANCE
PICTURE : TOM BANKS
BUILD IN THE CHANGES
Time to review buildings cover , says insurance boss
Review – Erimus Insurance Brokers commercial director Paul Davison .
Following the sharp rise in the cost of building materials , many property valuations may be out of date , leaving you underinsured . Any valuations that occurred pre-pandemic / Brexit may not have accounted for the recent unprecedented increase in the cost and availability of building materials .
Here , Paul Davison , commercial director at Stockton-based Erimus Insurance Brokers , discusses how property owners should look to review their current building sum insured .
WHO SETS THE SUM INSURED ? When you insure a building , it is your responsibility to decide how much to insure the property for . There is a common misconception that the buildings sum insured is the same as the market value , but this is not the case . In some instances , the rebuild value of a property may exceed the market value , depending on the construction materials used , whether the building is listed , and the location of the site .
The sum insured for your buildings should take into account the costs of demolition , debris removal and site clearance , as well as the professional fees for architects , surveyors or engineers to reinstate the property . Therefore , setting the sum insured based on the cost of a new development could leave you with significant underinsurance as it wouldn ’ t take in to account the cost of site clearance .
To set an accurate sum insured you can enlist the services of a RICS certified surveyor , particularly if the building is of non-standard construction .
DAY ONE UPLIFT & INDEX LINKING During a policy period , the rebuild cost could increase because of inflation . Insurers provide two remedies for this : Day One Uplift At inception of the policy , insurers will apply a percentage uplift on the stated sum insured , to protect against inflation costs . For example , a building valued at £ 100,000 with a 15 per cent Day One Uplift would have a maximum insured value of £ 115,000 . It is worth noting that maximum payable at the time of a claim is the inflation percentage recorded at the time of the loss - it is not designed to cover under insurance . Index Linking Insurers provide inflation protection without a percentage cap throughout the period of insurance . At the point of renewal , a new , higher , index-linked sum insured will be noted at no additional cost .
CAPITAL ADDITIONS The value of a building may increase if you decide to extend , improve or renovate the property during the policy period . If you fail to notify insurers of these changes , the property could be underinsured .
A policy with a capital additions clause would allow a percentage uplift on the sum insured to cover improvements to the property that may occur during the policy period . This does not relieve you of your duty to disclose material facts to the insurer .
INCORRECT SUM INSURED Most property owners ’ insurance policies will include a clause known as the “ Average Clause ”. It is designed to provide recourse for insurers when a property has been undervalued and insured for the incorrect amount .
In some cases , you may wish to retain a portion of the risk , which can be done via an increased excess . In this scenario , the insurer would still need to know the full insured value of the property .
WHAT IS AVERAGE ? If you have taken out insufficient cover , this means any claims will be insufficiently covered .
For example , if your building is insured for £ 250,000 but is worth £ 275,000 then it is deemed to be underinsured by 10 per cent . In the event of a claim , insurers would reduce any claims payments proportionately . If you were to make a claim for £ 50,000 under the policy , you would only receive £ 45,000 in line with the underinsurance .
There are separate remedies available to insurers under The Insurance Act 2015 if the underinsurance is deemed to be deliberate and / or reckless .
WHY DO INSURERS APPLY AVERAGE ? The basic principle of insurance is “ the premiums of the many pay for the claims of the few ”. Premiums are calculated by underwriters based on their perceived risk exposure .
In property insurance , the buildings sum insured is a key rating factor . Depending on the level of underinsurance , insurers could find themselves with a significantly higher exposure than they originally thought .
If insurers accepted claims for underinsurance risks , they would find their reserves were insufficient as the premiums would not balance with the risk . The Average Clause provides a fair outcome for insurers and the insured .
If you would like to discuss your building sums insured , or would like additional information , please contact Paul Davison on 01642 240400 or pdavison @ erimusib . com .
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