Make sure your building is valued correctly for insurance purposes.
It’s important that your property, particularly in the case of buildings where there are multiple flats, is insured for the full re-building cost throughout the lifetime of your policy. Correctly assessing what it would cost to rebuild a block of flats is complex and it’s always worth seeking expert advice. If you get it badly wrong and suffer a serious loss, your insurance protection may not cover all your repair costs and might leave you substantially out of pocket.. Insurers may not pay a claim in full if the Buildings Declared Value (BDV) on your policy is incorrect.
Insurers require you to insure your block of flats for an amount equivalent to the total rebuilding cost, which can be very different to the combined ‘market value’ of all the flats in the block. On your policy documents you will see this referred to as ‘the buildings sum insured’ or the ‘buildings declared value’.
If you under-insure the building, the insurer could 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 might be paid. Most policies make provision for the buildings declared value to increase over time, but if the original value is wrong this does not help much. We recommend you get the buildings valued by a surveyor with experience of insurance valuations.
The valuation exercise should be repeated every three to five years, as although insurers may index-link the sum insured each year, this is based on national indices and the actual cost can vary on a regional basis. So, over time, your rebuild value may vary from the buildings true valuation. We have set out some of the points that need to be considered in arriving at the correct figure over.
How to calculate your Sum Insured
Most policies require you to provide a ‘Buildings Declared Value’ at inception of the policy or at renewal. This value is the re-building cost at the date of inception or renewal, with no provision for future inflation. The insurers then provide an allowance (normally as a percentage of the declared value) for future inflation during the period of insurance and during any re-building period. This uplift percentage varies by insurer and is normally in the range of 25-50%. The policy is then issued for a sum insured equal to the ‘Buildings Declared Value’ plus this percentage. Whilst this uplift to cover inflation is a great protection for you against future, unpredictable inflation, if the original declared value is wrong you are still at risk.
Do you need to act now?
At Deacon, working with RICS (Royal Institute of Chartered Surveyors) approved surveyors, we offer competitively priced assessment reports which may not even require a site visit thanks to the wonders of the internet – and it doesn’t necessarily mean your premiums will increase. For example:
Everything is correct: You have a rebuild insurance valuation carried out and according to the report the current sums insured are in-line with the calculated rebuild cost. Fantastic! Everything is good and you should congratulate yourself because not everyone gets it right!
You’re over insured: You have a rebuild insurance valuation carried out and according to the report the current sums insured are MORE THAN the calculated rebuild cost. This means your buildings sum insured can now be set according to a professional assessment carried out by a ‘Regulated RICS’ organisation and may result in a reduction of premium and/or enhanced cover
You’re underinsured. ACT NOW: You have a rebuild insurance valuation carried out and according to the report sums insured as LESS THAN the calculated rebuild cost. What does this mean? Well, if the sum insured is say £600,000, but should be £1M, could you and your fellow leaseholders afford to pay the shortfall from your own funds to make up the difference? And remember, if you’re the Director of an RMC or RTM company, you might even be liable for the shortfall!
To arrange a rebuild cost assessment valuation for your property call or email us today for more information. You can also use our Contact Us form.
So what should be included in the ‘Buildings Declared Value’?
On this point insurer wordings vary in the detail, so the comments below are for guidance only. It is these extras that can lead to serious discrepancies. In addition to the re-building of the main structure of the premises and it’s fittings you need to consider allowances for items such as:
- Outbuildings such as garages, bin sheds, bicycle parks
- Roads, paths and landscaping
- Underground pipes & sewers for which you are responsible
- Costs of removing debris after a loss
- Architects, surveyors and engineers fees
- Provision for additional statutory requirements
- Communal contents
- Leaseholder improvements to their own flats
You also need to allow for VAT. Generally new buildings are not subject to VAT, but repairs are, so VAT should be included in the figures above.
As you can see, establishing the correct sum is complex and we recommend you get a professional valuation from a valuer who is a member of the Royal Institution of Chartered Surveyors (www.rics.org.uk). Once you have a correct ‘Buildings Declared Value’ to start the process, the value needs to be kept up to date year on year. Most insurers will have a clause in their policy that allows “index-linking” and insurers will update this figure each year in line with inflation.
They normally use a special index called the Building Costs Index Service (BCIS), as this specifically monitors building cost only. This can produce very different figures to the usual inflation index figures we are used to hearing quoted such as the RPI (Retail Price Index) or CPI (Consumer Price Index). With this index linking it is probable that the ‘Buildings Declared Value’ will remain reasonably accurate over time, but we still recommend that every 3 to 5 years you revalue the property to ensure the figures are still accurate. We do see discrepancies occurring particularly where buildings are listed or have specialist (or sometimes, imported) materials.
For a copy of our free Building Insurance Valuation Fact Sheet for flats click on the image below.
Deacon is part of Gallagher, one of the largest insurance brokerage, risk management and consulting firms in the world, operating in over 150 countries including 30 in Europe. You can find out more about Gallagher here (link to: https://www.ajg.com/uk/about-us
As with all insurance policies, the policy is subject to limits, conditions and exclusions. For more information please contact us to discuss further, or request a full summary of the cover or the full policy terms and conditions. The opinions and views expressed in the above article are those of the author only and are for guidance purposes only. The authors disclaim any liability for reliance upon those opinions and would encourage readers to rely upon more than one source before making a decision.
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.
FP1243-2018 (Fact Sheet)