Underinsurance and average clauses – surely a subject we have done to death? Please don’t yawn and skip this article; the topic is pertinent for a reason.
It is currently estimated that more than 50% of property in the UK is underinsured. It is by no means a new problem. However, the perfect storm of Brexit, a global Pandemic and now a European War have contrived to escalate the situation to unprecedented levels, which are only forecast to increase.
Underinsurance is bad for everyone; policyholder, broker, underwriter and insurer alike. Trying to explain an average clause to the policyholder who has just undergone a devastating loss of a home or a business is an unpleasant task. It leaves a nasty aftertaste and can result in lost business and valued clients who have become friends.
Property Value Misconceptions
It’s often tricky conveying a true rebuild value to someone who isn’t involved in insurance on a day-to-day basis. Many policyholders think that the property value for insurance purposes should bear some semblance to the current market value of the property. Some brokers even think that a reinstatement value can be calculated using only the Building Cost Information Service (BCIS) or by adjusting previous figures for inflation and calling it a day.
Rebuild costs can sometimes leave essential elements such as utility reinstatement, demolition, debris removal, concrete floors and groundwork unaccounted for. Anything that gets missed out is – you guessed it - further hard evidence of underinsurance.
When we come to value property rebuilds in the current climate, it is essential to start from scratch. Think about the specific details of what is on the ground in front of you. Survey the ground only, with accurately calibrated tools and no reliance on Google Earth and its random shadows, trees and old imagery. Other factors to consider include:
What is it made out of?
When was it built?
How deep is the concrete?
How old are the cement fibre sheets?
What are the services?
How is it accessed?
Could construction vehicles get around all of the property?
All of this must be noted before a rebuild cost assessment can begin.
If there are several buildings on a site – make sure the valuer knows the local names or numbers to identify each one and lays them out individually. If the policyholder wants to extend or demolish later, it will be easy to alter the valuation. If buildings have entered a schedule as a lump sum this is impossible.
Accurate Rebuild Cost Assessments
A RICS Registered Valuer should carry out the rebuild cost assessment. The Royal Institution of Chartered Surveyors is the global organisation which covers all valuations. They write the rules, teach the methods and govern their qualified members with stringent regulations.
If there is an issue down the line with the valuation and you have to push back, the RICS will aid in this redress. All registered valuers carry professional indemnity insurance with adequate run-off cover, so you can rest assured that your valuation is in safe hands.
Reliable Sources for Accurate Assessments
The Valuer must rely on multiple sources. Yes, the BCIS is one of these, and so is the current edition of Spons Pricing, or if you are rural – the John Nix Guide and the Agricultural Budgeting and Costing Book.
All of these sources rely on data input which must be given in advance. As a result, if you are undertaking a rebuild cost assessment for a mid-year renewal, they will already be well out of date. Or if the property you are valuing is unusual and has few comparables, the sample size will be smaller and the results less reliable. For this reason, they are more of a benchmark or base figure.
The true value will include recent tenders, locally completed projects of a comparable nature, a good look at this week’s figures for steel and timber and a consideration of the labour market. The valuer should regularly undertake rebuild valuations and be involved in actual tangible rebuilds. Their firsthand knowledge and experience make all the difference.
Working with Specialists
There are a lot of considerations which assist in building up the most accurate figure for the given time. This is the other trouble because the valuation is only as accurate as its day one basis. By tomorrow, it’s already out of date. Valuations should be undertaken at least every three years, more often if there have been substantial changes on a site. A good relationship with the underwriters will ensure appropriate uplifts or rebuild contingencies, to further protect the policyholder and their assets.
Avoiding Underinsurance for Peace of Mind
By being aware of the risks of underinsurance, you can take steps to actively avoid it. Reviewing your client’s policies regularly and working with a specialist such as Securus Risk Advisors will accurately determine the true value of the cover you require.
At Securus, we understand the market and our experts in property and building valuations provide brokers and policyholders with peace of mind, knowing they are fully covered.
For more information on underinsurance and how to avoid it, please contact Bridget Slade directly at Bridget.Slade@securusriskadvisors.co.uk.
