Under insurance in buildings – advice for policyholders
Why is it important to insure for the full rebuilding cost of a property?
On most insurance policies insurers will use the rebuilding cost of a property in order to rate a premium for an insurance policy. If you do not insure for the full reinstatement cost of the property the insurance clause known as the ‘Condition of Average’ will be applied. This condition is present on the vast majority of commercial and residential buildings insurances to act as a deterrent against not insuring for the full reinstatement value. Regardless of this condition, it must be understood that if a property is under insured and there is a claim – nobody wins…!
According to national firm of surveyors, Barrett Corp Harrington, a whopping 77% of the properties they survey are under insured by 45% on average. These figures alone should be enough to persuade you to treat this matter seriously!
So what happens in the event of a claim?
If your property suffers a major loss such as a fire / flood etc the insurers will very likely appoint a loss adjuster to handle the claim on their behalf. The adjuster will investigate the claim to assess the insurer’s potential exposure and to ensure the policy conditions have been complied with. They will carry out an assessment of the building sum insured to see if you have adequate cover.
If you don’t have adequate cover and you are under insured they will apply the Condition of Average which will work something like the following example;-
In this scenario we have a building which is insured for a sum of £1,000,000
At the time of a major fire which causes £500,000 of damage to the property the insurers have calculated that the buildings true rebuilding cost was actually £1,100,000
There was therefore an amount of under insurance at the time of the fire of 10%
The Condition of Average will therefore apply and the amount of the claim is therefore reduced by the same percentage – i.e. 10%
The net amount paid by insurers therefore is £500,000 less 10% = £450,000 less the appropriate excess of course.
As you can see, this 10% under insurance has cost our policyholder a significant sum of £50,000
What makes this look much worse is if you use the figures provided by Barrett Corp Harrington. In this situation the under insurance percentage averages 45%, this makes the figures look rather different as follows;-
Building sum insured £1,000,000
The fire costs £500,000
Insurers assess the building should be insured for £1,450,000 leaving the property 45% underinsured
Settlement by insurers £500,000 less 45% = £275,000. This leaves a shortfall of £225,000 to be paid for by the policyholder. In this situation the property owners often cannot afford the repairs and the property is sold as a fire damaged property at auction
Factors affecting the building sum insured
Without expert advice from a qualified surveyor it can often be very difficult to calculate a rebuilding sum insured for a property. The building sum insured is affected by many factors including;-
Outbuildings / external features
What out buildings does the property have? Outbuildings are usually classed as ‘The Buildings’ by definition in your insurance policy and the cost of reinstatement of these need to be included in the main building sum insured unless the insurance policy is written otherwise.
You need to consider garages, sheds, greenhouses, workshops, swimming pool, swimming pool changing room / boiler room (including cost of boiler), patio’s, hard landscaping, drainage, external lighting and garden walls to name a few. Even a garden wall can add tens of thousands to an amount insured. Here’s an example of a flint wall repair / renovation
Flint wall around a Church yard – 500 ft. long, approx 4 ft. high – cost of repairing the very old wall was £80,000 – this was a major renovation of the wall which used most of the old flint stones. If you were to calculate a rebuilding cost of this wall for insurance purposes you would need to include the materials themselves as well so the actual cost of rebuilding this wall for insurance purposes would be much higher than the £80,000 example we have used here.
If you are considering the rebuilding cost of a block of flats you may have other factors to consider such as car park surfaces, under ground car parks.
The methods of construction and the construction materials have a large affect on the rebuilding cost of a property. Stone is probably the most expensive (extensively used) material used for property. It is more expensive to build a property from stone, more expensive to repair, more expensive to maintain – you get the picture! Also the stone may come from a local quarry which may have closed years ago and it may be very difficult and very expensive to obtain stone to match the remainder of the property. All these factors affect the building sum insured.
Remember the roof. Apart from the obvious cost implications with a thatched roof, there are other factors to consider. Some old styles of tiles or slates can also be very hard to source as they may be out of production or, as with the example with stone elevations above, the quarry may have closed down and they need to be manufactured especially.
There may be special features such as gargoyles which need to be matched if there is significant damage to a property – again, they all add to the rebuilding cost of a property.
Historic / Listed Property
Any property which is ‘Listed’ or considered to be of historic interest need to be carefully assessed for rebuilding cost. Not only do you need to rebuild the property in the event of a major loss, you are also required to by law in the case of listed properties.
Age of build is also a consideration, not just for the old property but also for the more modern buildings. The newer the property, generally the less expensive the construction materials and methods are and the rebuilding cost will be lower. Is the property a ‘green’ house with solar panels, ground source heat pumps, wind powered electricity generators, huge panels of glazing and other bespoke features – if so, this will all add to the rebuilding cost.
The physical location is a factor often overlooked when considering a rebuilding cost for a property and it has potential to have quite an impact.
In the close proximity to traffic lights, cross roads, junction, bus stop, pedestrian crossing, railway level crossing, river, canal etc can all have a significant impact on the cost of rebuilding a property.
Imagine also for example, a large property in a central location such as Manchester, London, Birmingham, where there is a very busy city road, very busy pavements, main bus route and no parking. The cost to rebuild a property in this location will be significantly increased due to lack of access to the property for the following;-
Parking of contractors vehicles
Location of temporary site buildings (offices / wc / tool store)
Delivery of materials
All factors which cause inconvenience to a building project will increase costs and this must be incorporated into your rebuilding cost of the property.
Architects, surveyors, planning fees and VAT
Contained in the definition of your insurance policy will very likely be the inclusion of architects, surveyors and planning fees as part of your rebuilding cost. These typically add 10% to the overall sum to rebuild a property so must be included in your calculation.
Remember of course that VAT at the appropriate rate needs to be added for any existing property being rebuilt / repaired / restored following damage.
Can I use the market value?
Absolutely not. Never. Ever.
Using the market value of the property is the easiest trap to fall into when deciding on a rebuilding figure for insurance purposes – with potentially devastating consequences.
There is absolutely no correlation between the market value of a property and its rebuilding cost and there never will be. There are people in offices throughout this green and pleasant land that will give you their special formula using market values for calculating rebuilding costs and you should ignore every single one of them because they don’t know what they are talking about!
The only professional you can rely on to give you a rebuilding cost is a surveyor.
The only formula you can rely on is this one:
The rebuilding cost is often a lot lower than the market value.
The rebuilding cost is often a lot higher than the market value.
I think that pretty much sums it up…
Can I use the developer’s costs?
Developers may be prepared to give you a cost of building of the property that you have purchased from them. Do be very aware however that you mustn’t use it for your own building sum insured for your insurance. Developers will benefit from huge economies of scale discounts for building whole sites and the extent of the effect of these discounts. Also, developers don’t pay VAT on a new build property and if you are insuring the property, any repair works will be subject to VAT at the appropriate rate so you are under-insured by this factor alone.
In addition, you have to consider the costs of demolition of the existing structure, clearance of the site, and architects fees, as well as the costs of storage of materials, hiring in plant etc, none of which would need to be factored in on an individual basis by the developer.
So the short answer?
Can I do it online?
There is an online rebuilding cost calculator calculator.bcis.co.uk which you can use for some guidance. It is a good programme if you use it for guidance only but there is absolutely no substitute for a real live surveyor!
A professionally qualified surveyor can be sourced from www.rics.org.uk
Once you have digested the information which affects the rebuilding cost of a property it should provide you with enough information to be able to understand and appreciate the factors that affect the rebuilding cost of a property. These guide lines are exactly that, guide lines to enable you to understand – but not to enable you to carry out the calculations yourself. If you are in any doubt as to the adequacy of your building sum insured you should engage the services of a professionally qualified surveyor
An insurance policy requires you to insure for the full cost of rebuilding – get it wrong and it could cost you very dearly indeed.