Getting proper insurance cover for your property

When tragedy strikes and you need to make an insurance claim, it’s paramount that you get exactly what’s owed to you.  An important factor in ensuring a correct reinstatement value is an accurate valuation, which can be prove difficult to the uninitiated.

The best way to guarantee an accurate valuation of your property is to commission a regulated surveyor to perform a professional valuation.  This should occur at least every three to five years, as the value of the property can change over time.  Extensions and refurbishment can completely transform the appearance and functionality of a property, subsequently altering its market value and reinstatement.

A common misconception in insurance valuations is to assume that the market value of the property is equal to the reinstatement cost.  Whilst in today’s economic climate the market value is usually more, fluctuations in the market can drastically alter a property’s value, potentially making it less than it would cost to rebuild.  This is why we use a separate figure to evaluate the reinstatement cost.

What’s reinstatement value?

A property’s reinstatement value is the cost of rebuilding the property in the event of a total loss.  This can include:

  • Demolition and site clearance costs;
  • Garages, parking areas, boundary walls, fence etc. that need to be rebuilt;
  • External works, drainage, water supply, electrical supply, gas supply etc;
  • Any shoring and waterproofing required to surrounding land or buildings;
  • Professional and architect fees associated with the reinstatement work.

Just as over-insuring can present legal issues such as being accused of fraud, under-insuring your property can have expensive financial consequences, including inequitable insurance premiums and inadequate cover. This means the average clause could be enforced and your claim not being settled in full.

What’s the Average clause?

When a property is not insured to its full reinstatement value (ie. how much it would cost to completely rebuild from a total loss), the amount of money that the insurer pays out to a claimant is reduced proportionally.

For example, a property with a rebuild value of £500,000 but insured for only £300,000 is 40% underinsured. If the property is damaged, typically by fire, flood, storm and the cost of repairs is £60,000, insurers could reduce the claim by 40%.  This means the Insured only receives £36,000 from Insurers, leaving a shortfall of £24,000.

Who’s responsible?

The duty belongs to the Directors of right to manage companies, residents/tenants associations and freehold companies, or in some cases the managing agent, to present an accurate reinstatement value to their insurer.

Building Declared Value vs. Building Sum Insured

A policy on a block of flats will often feature two amounts, the first being the Building Declared Value.  This is the reinstatement value at the inception (first day) of the policy and the figure upon which the underwriter will case their premium calculation.

The second figure, Building Sum Insured, is an elevated figure afforded by the insurer and calculated by applying a flat percentage increase to the Building Declared Value (usually 15% to 50%).  The reasoning behind this uplifted figure is that construction costs and inflation tend to increase during the period of the design, planning tendering and rebuilding of the property.

It is vital to understand that the Building Sum Insured is not to be treated as a fallback or replacement for an accurate reinstatement value.  The initial Building Declared Value will always be the overriding factor in any decision taken by the insurer when considering whether to fully cover a claim.