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.
Insurers never look favourably on claims where the property has not been insured for its correct value, especially in cases where the value of a property has been purposefully declared low to reduce the annual insurance premium.
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. Other insurers may take a different approach and refuse to pay anything at all.
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 linking 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 fully and properly insured.
Deacon recommends that owners of any listed building should hire a specialist surveyor to ensure that the rebuilding costs are valued correctly.