While most buildings insurance claims are settled to mutual satisfaction, a significant number still hit the buffers when a discrepancy arises between the sum insured and the actual rebuilding cost. James Truscott advocates the professional valuation as the ultimate win/win solution.
The Curse of Underinsurance
Last year Cardinus carried out over 2,500 valuations for clients, and sometimes for brokers. There was a wide variation between current sum insured and the measured valuation figures and whilst a few properties were overvalued, the vast majority were found to be undervalued. An average 20% underinsurance was the norm.
An insurance press article published last year reported that an Aviva property survey found 86% were significantly underinsured. Mike Colmans, property owners underwriting manager for Aviva stated that accurate sums insured on a property are vital to guarantee receiving the full amount in the event of a claim. “As many as 50% of claims for damage to buildings are being settled below the cost of reinstatement, which could have a significant impact on property owners who would have to fund the difference themselves.”
Let me start by stating that in our experience property insurance values are seldom correct. A good number are underinsured by 20% or more. That’s borne out of actual revaluations carried out on behalf of clients over the past few years.
With partial losses, the average level of underinsurance can get lost. But what happens when a catastrophic total loss occurs? This is where the fun starts!
Whilst there is no intention to be alarmist, it’s a potentially shocking thought that many buildings appear to be underinsured, with consequential financial risks that do not bear thinking about.
But brokers can protect themselves and their clients by adding value – the simple recommendation of appointing a valuation provider and earning an introduction fee. A true win/win!
A professional valuation will be an assessment of the total reconstruction cost of the premises based upon a ‘total loss’ scenario.
How often should this be carried out? Good practice suggests every three years, and this should also include buildings built within the last three years if a professional valuation has not been carried out.
For modern buildings where developers have established the sum insured, our experience has shown that many buildings are substantially underinsured. Factors that may not necessarily have been taken into account can include:-
- Debris removal costs
- Architects and surveyors fees
- The cost of meeting local authority requirements in the event of re-build
With regard to VAT, this is a complex area and some valuers will remain ‘silent’ or suggest reference to an accountant or insurance professional for advice. In general terms, the building of a new single dwelling or residential block is zero rated for VAT. However, the vast majority of claims are not for a total loss and therefore VAT is applicable to rebuilding costs.
It is also important to consider the VAT status of the policyholder and/or claimant. Many property owners or landlords are not registered for VAT and it is most likely that insurance claims made by tenants within a residential block are also not so registered, and therefore unable to claim back this aspect from HM Revenue and Customs.
In the accompanying underinsurance example, residents faced with such a bill -which equates to almost £14,000 each – would doubtless ask why the shortfall arose. And some may argue there a contingent professional indemnity expose to the insurance broker if they have not advised the client to obtain a professional valuation. At the very least there’s a very unhappy client!
So getting rebuilding sums insured right is critical, and as a broker or insurer surely there is a real opportunity to add value to policyholders and clients by giving them a solution. After all, aren’t we all looking to solve problems rather than adding to them?
Underinsurance – Example
Consider a block of 30 apartments with a current sum insured of £3,600,000.
Assume a rebuild value was actually £4,320,000 (in other words it was undervalued by 20%) and a claim was made at a cost of £2,500,000.
Then, if insurers applied an averaging clause saying the cover was only 83.33% of the true building value, the settlement made by insurers might be just £2,083,250 – leaving a shortfall of £416,750 that would have to be met by the residents collectively.