How to check if you’re building insurance will cover the cost to rebuild your property
Whether it’s described as the rebuild cost, buildings declared value or reinstatement costs following a total loss, failing to insure your building for the correct value can be disastrous.
‘Blocks of flats’, for insurance purposes, can be anything from two flats in a converted house to many more in a purpose built block, including listed buildings, making it easy to see why rebuild costs could stretch into hundreds of thousands of pounds – and helps highlight why insurance validation is so important.
On your policy documents, you will see the value referred to as ‘the buildings sum insured’ or the ‘buildings declared value”. If you under-insure the buildings, the insurers 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 re-building cost increases 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 changes do vary on a regional basis. So over time, your rebuild value may vary from the buildings true valuation.
Are you confident you are adequately covered in the event of a claim?
After all, who wants to have a tricky conversation about how an insurance claim payout might not meet expectations, especially if it involves multiple flats and hundreds of thousands of pounds.
Searching for competitive, professional building insurance valuations?
At Deacon, working with surveyors approved by the Royal Institute of Chartered Surveyors (RICS), we offer competitively priced assessment reports which may not even require a site visit thanks to the wonders of the internet.
When it comes to your buildings insurance cover, knowing that you have the right level of cover in place provides peace of mind and could save you thousands of pounds! 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!
How do you calculate the 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.
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 fittings, you may also 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.