When your properties are assessed, you must be careful to list the correct values of your real estate to avoid underinsurance when sums insured are calculated.
Reinstatement cost assessments

In this article, we outline what a surveyor is looking for when they make an assessment, what can happen if you fail to disclose the correct value of the building and how Gallagher can help you to ensure that you’re adequately covered.

RCA’s best practice

RICS members have consistent methods for inspecting buildings and creating assessments. They have best practice for assessing what the sums insured should be, by calculating the full reinstatement cost for insurance purposes on a day one basis.

In order to do this accurately, an onsite inspection will need to be carried out. A report would be produced with the correct sums insured. This should be reassessed on a regular basis with a major review and reassessment made every three years or earlier if significant changes have occurred. Failure to do so could result in underinsurance, which could result in you receiving a claims payment of less value than what your property is worth, and insurers can apply a term known as “average”. An average clause will be on all property owners’ policies, but the good news is, you can ask for the average clause to be removed from your policy if you have had an approved RICS reinstatement cost assessment.

There are different types of reinstatement including reinstatement plus inflation provisions known as day one reinstatement and reinstatement minus wear and tear. Of course, if there are no plans for a building to be repaired following damage or, the cost to do so would not be economically viable then a different type of indemnity could be considered, for example if the building has no tenant with no prospect of finding one or, is no longer in a desirable area. In these circumstances, an indemnity cost with site clearance, debris removal and ‘making safe’ costs only could be a better option. Your premiums can reflect the different options available to you, so it’s important to get it right based on your plans for the future.

Don’t be caught out by underinsurance and have the average clause apply to your claim.

Deciding to take out an insurance policy for building damage purposes is only the first step, so you should ensure your reinstatement figures incorporates your true costs for the whole site and in accordance with your building definitions on your insurance policy. Failure to do so could end in a nasty surprise when you come to settle a claim as you may have a huge loss on your account, which was not accounted for and therefore is not recoverable. If Insurers apply average to the claim, then this will also delay and effect the business interruption / loss of rent claim; which in difficult financial times could be a strain on the business.

The average insurance clause would calculate your claims payment as follows:-

Claim = The amount suffered x Insured amount / Total cost.

If you are 30% underinsured, then your claim would be drastically delayed, due to understanding how much the insurers will take off your claim, by a qualified loss adjuster working on behalf of the insurers; and you claim could result in a 30% overall reduction in the settlement costs. This could be catastrophic to any property owner who would normally expect the total costs to be paid. The tenant would also suffer with the delays that could happen.

Any building sum should include internal features, boundary walls, outbuildings, carparks, and landscaping. Generally, if you think it could be damaged, then you should include it if you have an insurable interest. You should also note professional fees and demolition costs should the worst happen; and make sure the VAT is added correctly. You should also record any exclusions (depending upon the lease, which will note responsibility for insurance risk) such as the tenant’s fixtures and fittings.

Reinstatement cost assessments - should be an ongoing consideration.

Reinstatement cost assessments should not be carried out only once. You should reassess the sum on a regular basis, with a yearly adjustment made to factor in inflation. Insurers can apply indexation to assist (an annual % increase to keep in line with inflationary increases), between the years, when another assessment may be due. As previously stated, a major review and reassessment should be carried out every three years minimum. In the event that you have not insured the full value of the property, insurers will apply an average clause as they have not been collecting high enough premiums to cover the real risk value calculated by their underwriters, and they require the insured to advise them of the true costs on their policy from day one.

Gallagher can help you by providing an average waiver, which will temporarily waive the average clause and protect your claim value. We can help on portfolios by offering blanket average waiver too (an extension of cover we can include with certain insurers). Real Estate wordings can be amended, so the average condition states that average applies only where the overall sum insured is inadequate, rather than the value allocated to the loss address. Having true costs from the outset helps you, the insurers and most importantly your tenants. If the tenants are paying the premium you will have a duty to make sure the costs are accurate and correct. We can help you establish what should be included in the buildings declared value on your policy, based upon the circumstance and intentions of the building, and any other important considerations i.e. a listed buildings or, a property in a conservation area.