20 May 2020

Property Owners – how to avoid the pitfalls of underinsurance

Given that you’re insuring potentially your most valuable investment, Property Owners’ Insurance is very personal and you need to get it right. You can certainly save if you shop around, but this isn’t car insurance and there is a huge difference in the level and quality of cover available. You need to arrange for a worse-case scenario, especially if your pension fund and investment strategy are influenced by the appreciation and growth of your property portfolio. You also need a provider who can guide you in setting the correct declared value of your property.

Myth-busting: the correct declared value

One of the most common myths is to declare the market value of your property as its reinstatement value, whereas nothing could be further from the truth. It’s a dangerous mistake to make and many cases of underinsurance stem from selecting an arbitrarily derived market value.

So, what is the reinstatement value? It’s the figure you provide that represents all costs involved in redesigning and rebuilding your property. This includes a wide range of expenses, including demolition, removal of debris and hazardous materials; legal and local authority expenses; materials and labour; architect’s design costs. Many of these costs will be dictated by the construction market, based on supply and demand at the time of reinstatement. As you can see, the potential selling price of a property is no measurement of what it will cost to rebuild!

The ‘Average Clause’ and its pitfalls

In the unfortunate event of a claim, whether big or small, a loss adjuster will assess the reinstatement value and whether it reflects the true cost of rebuilding your property in today’s terms.

If the value is deemed to have little bearing on the true cost, the insurers may decide you’ve misrepresented the risk and have the right to void your policy and refuse the claim. If the value is too low (and almost all Property Owners’ insurance policies have an ‘Average Clause’ giving insurers the right to act) any claim settlement will be reduced proportionately, in line with the amount by which the property is uninsured.

Example: A property is insured with a £1m reinstatement value. Fire engulfs part of the property, causing damages of £200k. After the survey, it transpires the actual reinstatement value is £2m, leaving 50% uninsured. Consequently, the claim settlement is proportionately reduced by 50% leaving a claim payment of £100k and a shortfall of £100k. With duties to tenants and often further parties, you may be contractually obliged to fund the shortfall.

Footing the bill of a £100k shortfall is a challenge for any business or individual and can certainly damage cashflow. But matters could be much worse if the whole building was destroyed.

A simple step to prevent underinsurance

A simple step to avoid such a scenario is to commission a property survey from a Chartered Surveyor. It represents a small cost that can save you a substantial amount further down the line. Remote surveys are available inexpensively online, many approved by the Royal Institute of Chartered Surveyors, and most insurers will stand by the figures provided, but you must check.

As most policy wordings give you the benefit of the doubt if you’ve obtained your reinstatement value from a RICS-approved survey, it’s a quick and effective way to remove the risk and uncertainty that the Average Clause can bring. But make sure your survey is conducted before the policy begins and that you review it every three years.

As a leading independent insurance broker, we can help you arrange this, and provide preferential rates available from RICS-approved surveyors. To find out more, please contact Rob Marshall ACII, Head of SME and Digital at Erskine Murray on 0116 265 4300 or email: [email protected]

Rob is a Chartered Insurance Practitioner based at our Head Office in Leicester, where he runs an SME team that includes a Schemes Team providing Property Owners’ schemes for over 2,000 SIPP & SSAS owned properties.

As well as the Declared Value of your property, we’ll cover other areas where your Property Owners’ insurance may be inadequate, such as Loss of Rent and Contents cover, in further articles, highlighting the pitfalls and preventive action you can take.