Being underinsured because you have inadvertently under-declared the building’s value can put any claim you need to make at risk. The buildings declared value (BDV) on your policy refers to the cost of rebuilding from scratch after a total loss.
You may feel this is so very unlikely that it’s not important, but it can have major financial implications if it were to happen. This is because the buildings declared value is also the benchmark for every other claim. So, if loss adjusters found that your buildings declared value was too low and you were underinsured then any claim, no matter how big or small, could be reduced in proportion.
That’s because insurers may apply a calculation known as an average clause. For example, if a property is underinsured by 20%, this means only 80% of any claim would be paid.
Don’t rely on index linking alone for your buildings declared value
You cannot assume that index linking will keep your valuation up-to-date, and if your starting point is wrong then any underinsurance could be compounded year after year. Be especially wary with relatively new blocks. The buildings declared value you have been relying on and simply index linking may have been based on the developers’ VAT-free costs, not the VAT-inclusive bills for later repairs following a claim. If your building hasn’t been professionally valued for several years, you should consider commissioning a surveyor to update your buildings declared value.
Underinsurance can be a gradual process that builds up over many years, and big gaps between buildings declared value and actual costs can open up.
An example of an underinsurance case
Perhaps the biggest example of underinsurance our team has ever come across was a block in Glasgow that was introduced to us. We immediately spotted that the buildings declared value of the Grade II listed building seemed wrong. On checking, it turned out that the building was underinsured by almost a quarter of its real value, and to the tune of over £1 million.
Potentially, the block’s leaseholders could have been liable for losses up to £1 million. They could then take action against the block freehold owner or managers, who, in many cases, are one and the same. Increasingly, leaseholders are also shareholders in the freehold of blocks of flats.
This is why it’s important to get the buildings declared value correct. You may notice a figure for sum insured on your policy, and that it is higher than the buildings declared value. Don’t confuse that for a buildings declared value uplift, as it’s actually an allowance for inflation and the costs of claims that may occur during the 12 months of your policy. It doesn’t correct under-declaration of buildings declared value and underinsurance.
There is no such thing as an average block of flats, and each needs its own accurate valuation. We are able to help you arrange rebuilding cost valuations which may involve site visits, but these days can also be done by desktop valuations performed by knowledgeable professionals.
Blocks of Flats Insurance from Gallagher
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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 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.