The content here does not purport to be comprehensive or to give legal advice. While every effort has been made to ensure accuracy, Deacon cannot be held liable for any errors, omissions or inaccuracies contained herein. Readers should not act upon (or refrain from acting upon) information contained herein without first taking further special or professional advice.
The Buildings sum insured shown in your policy schedule is the maximum amount the insurers will pay for rebuilding in the event of a loss. It should represent the total cost of re-building assuming a total loss, including damage to outbuildings, car parks etc, and should also have an allowance for debris removal costs and professional fees that will be incurred. Additionally, there should also be an allowance for inflation during the period of insurance and any period of rebuilding. As this inflation allowance is difficult to estimate for future years, we recommend you arrange cover on a ‘declared value basis’ (see ‘What does ‘buildings declared value’ mean?‘).
Policy schedules often show two values on the buildings: one referred to as the declared value and one as the sum insured. The important difference between these two is how the policy protects you against inflation in rebuilding costs. When you calculate the declared value, it is the same as calculating the sum insured except that you do not need to add anything for possible inflation which may occur during the policy period or during the time taken to repair/rebuild following a claim. The policy then includes an allowance (typically adding a maximum of 50%) for inflation during the year and, more importantly, during the rebuilding period, which, in the event of a serious loss, could be a number of years. The insurers will then pay the maximum of the declared value, plus the amount by which inflation has increased the declared value stated at the start of the policy period the added allowance protecting you from inflation, without you paying more premium. Declared value is often referred to as ‘day-one value’. We always recommend you arrange cover on a ‘day-one declared value’ basis.
This can cause major problems. It is a requirement of the policy to insure for the full rebuilding cost (see ‘What is meant by ‘buildings sum insured’?‘ and ‘What does building declared value mean?‘). If you do not, insurers may apply a clause called the ‘condition of average’. This means that if you have only insured for half the correct rebuilding cost then, in the event of a claim the insurer may pay only half the claim. In the event of a claim (particularly a large one) insurers will usually ask the loss adjuster investigating the claim to check the declared value of the property.
Failing to insure your building for the correct value can be disastrous. If you under-insure the buildings, the insurers will reduce your claim in proportion to the under-insurance. For example, if you insure for 50% of the correct value, only 50% of your claim will be paid. Whilst many policies make provision for cost increases over a period of time, if the base value is wrong this does not help much. So we recommend you get the buildings valued by a surveyor with experience of insurance valuation. The valuation exercise 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. So over time, your declared value may vary from the true building’s true value.
This can be done on one of two bases:
1. Monthly increases (common on general household policies)
2. A single increase at each renewal
The first option is not necessary if your sum insured was originally calculated on a ‘declared value’ basis, but we would still recommend you increase at renewal. We generally recommend that the ‘declared value’ is increased by the annual percentage shown in the Building Cost Information Service (BCIS) Index which is provided by the Royal Institute of Chartered Surveyors (RICS). We confirm that all of the Blocks of Flats policies available from Deacon automatically increase the Buildings Declared Value at renewal in accordance with the BCIS Index. We would expect your insurer to be telling you what this is each year to help you on this point.
A general household policy normally includes this cover automatically so you don’t have to worry about it. However, for insurance purposes blocks of flats are treated as commercial premises. It will not usually include cover for terrorism and you have to request it, and the insurer will charge you an additional premium. You don’t have to buy it, but in making that decision, please think about:
In city centres the extra cost can be quite expensive, reflecting the higher perceived risk in built-up areas.
It is the law that if you employ anyone you must have insurance to cover your legal liability for injury they sustain caused whilst they are working for you. (Employers Liability Compulsory Insurance Act 1969). For a person to be considered an employee it is not necessary for there to be a formal contract of employment in place. You may only use casual labour, such as a gardener once or twice a week in the summer, but they are still employees. Also if the Residents Association is a legal entity the directors and officers though not paid would be deemed an employee so cover must be arranged. But even if it was not a legal requirement to arrange this insurance, we would still recommend you buy this cover. A serious injury could result in damages and legal costs running into hundreds of thousands of pounds, and if you are not insured you are still liable for these potentially huge costs. The likelihood of a claim is small and for this reason, unless you employ people doing hazardous work such as tree felling/lopping, work at heights, use of scaffolding, then there is no charge for this cover. The cover is arranged for a limit of indemnity of £10,000,000 so giving protection against even very large losses. You will be supplied with a Certificate of Insurance which should be displayed at your property. We do have a legal requirement to record your Employee Reference Number (ERN) on any Employers Liability Policy we arrange. The number is stored by the Employers Liability Tracing Office, and is to enable policies to be traced if sometime in the future an employee wants to make a claim on a previous employer. If you do not have an ERN you may not if you only employ a small amount of casual labour; we can record you as exempt.
Any person or company who owns or uses property has a legal duty to provide a safe environment for visitors and any other person legally on the premises – visitors, contractors, the postman. If you fail in this duty of care the residential management company could be held legally liable for the injury resulting in huge costs and damages being awarded against you. Property owners’ liability will protect you against these costs. This type of claim is, in fact, quite common. We often see claims for such things as tripping on cracked pavements, slipping on wet floors, and even apparently small injuries can result in claims well over £1,000. It’s also worth noting that if you are insured, the insurers will pay to defend you against spurious claims. Did you know… you can be held liable if a trespasser or burglar hurts themselves whilst illegally on your property!
When you agree to act for a residential management company in a formal capacity as a director (or on an informal basis as a committee member), under company law you are treated no differently to a director of a major PLC. So if you, or your fellow directors, make an innocent error or fail to do something you should, you can be held personally liable for the financial consequences. This insurance protects you financially as the insurers will defend you if possible, and if not, pay the legal costs and damages awarded. The cost for this cover is relatively small and we always recommend this cover is arranged. We suggest you make it a condition of becoming a director that this cover is purchased.
This is an area where you need to be very careful, as policies vary enormously. The definition of ‘buildings’ includes permanent fixtures and fittings in the communal areas and in the flats. Most (but not all) policies automatically provide cover for communal contents in common areas, but normally only for a fairly low limit – check that this is enough. But policies are not designed to cover leaseholders or tenants’ personal property. They should arrange their own cover for this. If you are a landlord letting out furnished accommodation see ‘Can a landlord insure contents in flats?‘.
If you are acting as a landlord and are renting furnished accommodation it is possible to insure such contents with the buildings. The insurers will need to know the replacement cost of the contents and probably the maximum amount in any one flat if you have more than one. The cover on the contents may be more restricted than a normal household contents policy. This is because experience has shown that tenants’ level of care can often leave something to be desired! For this reason, accidental damage is not automatically included by many insurers – but you may be able to buy this for an extra premium. Also, there is often restricted cover for theft or malicious damage by tenants and/or an increased excess amount. You must bear in mind that this insurance is not an end of tenancy re-fit. If a flat is left in poor condition, the insurers will not consider this to be accidental or malicious damage insured by the policy.
If you buy a policy specifically designed for landlords, you would expect this to provide cover for loss of rent (or alternative accommodation) following damage to the property. Cover is normally restricted to a certain number of months, typically 12 or 24 months, and a percentage limit based on the buildings sum insured. If you are not insuring the building on the same policy, you may have to specifically request this cover. You can also get cover in some circumstances for loss of rent due to a tenant defaulting. It’s not a cheap insurance to buy, but if you are dependent on the rental income to cover a mortgage, it should be considered.