As a landlord, you are responsible to ensure that your property is insured for the correct amount. Landlord insurance is calculated on the reinstatement valuation of your property. That is what it would cost to rebuild the property back to its original state. Many landlords often use their surveyors’ report for this figure. If the property has recently been bought or re-mortgaged this won’t be an issue. You are responsible as a landlord to ensure that you have an accurate rebuild cost.
Did you know that if you make a claim and the reinstatement cost is incorrect it could cause you a problem?
When you insure your assets, like a building, you must advise the insurer of the value to insure the property for. If you get this insurance value wrong and it is lower than the real reinstatement cost assessment value then you are at risk. Meaning that in an event of a claim insurers will only pay a percentage of the claim amount. This method of paying out a percentage of a claim is known as a condition of average.
For example, the insurance policy covering the listed buildings is based on a sum insured of £80,000.00. When a claim occurred the real insurance value was £100,000.00. The proportion of average would then be £80,000.00 or 80%. You would only receive 80% of any loss that you suffer.
There are various ways that property owners can calculate the rebuild cost but the easiest way is via https://abi.bcis.co.uk/. The website will work out for you the exact residential rebuilding cost. It only takes two to three minutes to register and go through various questions to help you. You could alternatively instruct a local surveyor. Their costs are upwards of £250.00 but it is so important that you get it right.
You will often find that the rebuild figure is lower than what the properties market value is. This is because in real terms it is what it costs to rebuild not what it is valued at today. There are rare exceptions of when the property value is lower than the rebuild cost but these are market-specific.
Affordable and professional insurance valuations
We have teamed up with rebuildcostassessment.com. To provide you with affordable reinstatement costs. Buildings insurance should cover the amount required to rebuild. Yet, fewer than one in ten commercial or residential properties in the UK are covered correctly.
If you are over-insured, you are paying too much for your building insurance. If you are under-insured, you face a reduced pay-out in the event of a claim. Insurance claims can be reduced by hundreds.
We are able to provide you with a comprehensive rebuild cost assessment (RCA) report guiding you on how much you should insure your building for. This is a fantastic and affordable online service. Which can protect your organization from the severe consequences of under insurance. Backed by the Royal Institute of Chartered Surveyors organization it lasts two years.
What is declared value and building sum insured?
The declared value is the value of the bricks and mortar. It covers everything fixed to the property including fitted kitchens and bathrooms from the day the policy starts. It is the most important figure. The sum insured figure is always higher than the declared value. This is to cover the cost or rise in building materials or inflation over the period of the insurance.
If your policy shows a building declared value and a building sum insured, then the policy itself includes an allowance for inflation. This means from the day your policy starts to the day of a potential claim it takes into account any sudden rise in inflation. Building materials and labour costs affect the declared value. So, the percentage increase in the building sum insured ensures that the building is never underinsured. Don’t be afraid of insurance terms we are here to help.
You need to understand that a lot of British insurers aren’t able to help with the rebuilding cost. There is a house rebuilding cost calculator. But these can often be very complicated and a site visit may be needed. In respect of listed buildings, it is more than likely that you would need a chartered surveyor to attend the premises. There are a lot of articles on building cost information. But there is also BCIS rebuild cost calculator which will also be able to help you calculate your sum insured. They will list out whether it is standard construction. House types and what type of construction method was used in the property to completely rebuild it. These are all regulated by the Royal Institute of Chartered Surveyors. It is important that you get the right cover and that is why we have teamed up with the above company.
Protecting Your Property – Underinsurance Guidance on property rebuild costs and valuations
As a property owner it is crucial to ensure that your assets including buildings, contents and rental income are adequately insured. Taking buildings insurance as an example, your sum insured should reflect the cost to totally rebuild your home and this would include not just the materials but professional fees too such as architects and surveyors.
Why it’s important to get your sums right
The main reason for getting your sums insured right is because of the possibility of underinsurance. Most insurance policies will have an underinsurance clause called ‘average’. What this means is that if you make a claim and your sums insured are too low, the amount you are paid can be proportionally reduced. Example of a claim impacted by ‘average’ due to underinsurance A medium sized property built of brick with a pitched tiled roof has a buildings sum insured of £450,000.
A storm hits and the ground floor is flooded causing £80,000 worth of damage to the property. The claim investigation assessed that the true rebuild cost of the property was £600,000. This figure was based on costs including the rebuild, demolition, pathways, professional fees, garden fencing and statutory services.
The property was underinsured by 25% The ‘average’ clause proportionally reduces the claim payment in line with the percentage of underinsurance. The claim was for £80,000 so the payment is reduced by 25% to £60,000. The difference will need to be met by the policyholder to complete the repairs.
Why you might be underinsured The impact of Covid lockdowns causing the slowing of material production with increase demand, and delays of EU imports due to Brexit have seen costs of materials and labour increase significantly in the last 12 to 18 months.
The Building Cost Information Service (BCIS) general building cost Index indicates a rise of 10.2% in September 2021 compared to the same period one year ago. The BCIS Materials Cost Index represents the largest contribution to this increase, with the overall cost of materials in the index rising approximately 19.7% during this period.1 BCIS commented in 2021 on how this increase translates: “The cost of materials to construct a three-bedroom, semi-detached house has increased by 14% or around £7,300 between January and September.
It is expected to grow by further 1% or £600 by the end of this year.”2 Looking at supply, the Construction Leadership Council reports that: “…as in previous statements supply challenges continue…” With regards to one building material, they state that: “The high level of demand means that a shortfall in the domestic production of bricks, which is already at full capacity, will continue throughout 2022.”3 Increasing costs alongside rising demand and delays of imports may mean you could be underinsured.
Review your sums insured
It is good practice to review sums insured with your insurance advisor at least annually when your insurance policy falls due for renewal, but you should also ensure you are aware
As recent changes from inflation have lead to increased building costs across the UK, this could mean that the estimate cost to rebuild a property will no longer be enough to cover the real cost of a rebuild.
With this risk of underinsurance becoming more prevalent policy holders may need to be reminded that, should they wish to make a claim for rebuild of their property, the amount that they are currently insured may not be enough to complete for the works. Any underinsurance may result in a proportion of their settlement on their claim not being paid.
Did you know in September 2022 due to international shortage of materials the following has seen the average cost increase by 23% in a year and items below even more:
- MDF cost increase – 52%.
- Timber cost increase – 30%
- Copper cost increase – 20%
- Lead flashing cost increase – 31%
Labour costs are on the rise too due a shortage of labour. Compounding by a 42% decrease in European labour following Brexit.
64% of building materials are imported to the UK from the EU, so Brexit enforced delays at customers are causing delays in getting projects started and completed. Adding further costs.
80% of UK properties could be underinsured, with over 500,000 high value homes at risk. Underinsured in commercial property is estimated to be around 340 billion!
Summary
I believe that it is absolutely critical for landlords to check their landlord insurance rebuild cost. We have had one very bad experience for a landlord where he cancelled the index linking over many years. This lead to the property being underinsured. Whilst he was saving £30.00 or £40.00 each year by removing it, it came to a devastating end when the property burnt down. Due to the removal of index linking, the pay out was £30,000 less than the full claim amount. I would strongly advise all landlords to check their rebuild figures using the link that we have provided above.
