What if insurance doesn’t cover the cost of the damage?

Who pays then?

Undervaluing buildings can be a costly mistake.

When the couple in the ground floor flat learn that insurers are only going to pay for two thirds of the cost of damage to their flat that was caused by an escape of water from a flat two floors up, they are not going to be pleased.

Nor will all their neighbours be happy when they realise that the shortfall may end up on their service charge budget and everyone could have to pay out.

Then again, the lease might not allow for such levies to service charges, in which case other leaseholders may choose to seek recompense from the hapless owner of the flat that flooded in the first place through no fault of his own.

Or perhaps they’ll choose to sue the directors of the management company or the freeholders for failing to ensure that the building was adequately insured in the first place.

Woe betide the volunteer directors of the residents’ management company who don’t have Directors & Officers liability cover.  They could be sued personally and might even lose their own assets. 

What you need to know about underinsurance

And why would all this have arisen in the first place? Probably simply because the building declared value (BDV) is too low and the building is underinsured.

Maybe someone thought they could save money on premiums by not updating the BDV or, more likely, they assumed that automatic index linking will have kept them up to date.

Buildings declared value (BDV) is the cost of rebuilding following a total loss.  And you would be wrong in thinking that, with the chances of a total loss may be low, you don’t need to review the BDV and potentially pay a higher premium?

This is because any claim may end up being reduced by the percentage by which you had under declared. So, if you’ve under-declared by, say 25%, then a claim settlement for storm damage to the roof or the aftermath of a significant escape of water cascading through multiple flats, could also be reduced by 25%.

Industry price indices may not take into account local variations in costs or the unique features and circumstances of your building.  Undervaluation can creep up and compound itself over the years.

You can read more about this and an actual case where we found a £1M discrepancy (exposing individual leaseholders to potential losses of £83,000 each!) here.

For more information on insurance valuations you can view our fact sheet here.


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 the links which were active at the time 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.