Don’t fall victim to reduced pay outs if you need to make a claim
As a specialist broker providing insurance for blocks of flats for more than 27 years, we know failure to insure your building for the correct value can be disastrous.
Some insurers will apply a calculation known as “apply average”. For example, if a property is underinsured by 20%, this means only 80% of the claim may be paid.
While many policies make provision for cost increases over a period of time, if the base value is wrong this doesn’t help much. To obtain the most accurate buildings declared value (BDV) we recommend you get the buildings valued by a surveyor with experience of insurance valuation.
The insurance valuation should be repeated every three to five years, because although insurers may index-link the sum insured each year, this is based on national indices and the actual cost changes can vary. Over time, it means your declared value may vary from the building’s true valuation.
The importance of not relying on index lnking alone cannot be over emphasised according to specialist claims handler James Parsons from Deacon, who recently handled a case where he discovered the block of flats was under insured by over £1 million – a staggering 24% of its value.
If the 14 leaseholders had needed to make a complete re-instatement claim, they would have each been £83,000 out of pocket because the loss adjustors would have been obliged to reduce any pay out by a corresponding 24%. And while legal action can be taken against the individuals arranging the cover, this doesn’t help where the leaseholders each own a share of the freehold.
Deacon’s Client Relationship Manager, Nigel Feast, commented: “In this case, it was a genuine oversight, but the potential £1m-plus loss serves as a timely reminder to other blocks that failing to revalue and declare the true building declared value is a false economy.”
Under-insurance can be a gradual process that builds up over many years, as the original rebuilding cost is index-linked without really examining the costs it is supposed to underpin. It may be that the original sum was an estimate and, in the case of relatively new blocks of flats, it is often based on the developer’s costs. These will not include VAT, which will immediately add 20% to the actual cost of repairs and make-good works. Builders too will have purchased materials and contractors’ labour at favourable, bulk-buy rates.
In the case of the Grade II listed Glasgow block, it was only the diligence of Deacon advisers that led to an anomaly being spotted and an arrangement made for the building to be revalued, resulting in it now being insured correctly.
Deacon recommends that owners of any listed building should hire a specialist surveyor to ensure that the rebuilding costs are valued correctly.
The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited trading as Deacon accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.