This raises questions for property owners as to whether they are adequately insured, and what steps can be taken to avoid underinsurance, which can result in claims payments being reduced.
Ensure your Building Reinstatement Cost is correct at renewal
The most important step to be taken to ensure you are adequately insured is by checking your Building Reinstatement Cost(s) at inception and/or renewal of your policy. We recommend a Royal Institute of Chartered Surveyors qualified professional is engaged to provide Reinstatement Cost Assessment(s). These valuations can be undertaken via site visits or alternatively ‘desktop’ valuations can be produced relinquishing the need for site visits. It is not uncommon for property owners to rely on previous owners’ insured values or historic reinstatement assessments; when factoring the rising rebuild costs, this can lead to significant underinsurance and is a very risky approach to take.
Ensure your policy has a ‘Day One’ inflationary provision included
Once you have an adequately set on your reinstatement value for ‘Day One’ of the insurance period, also known as a ‘Buildings Declared Value’, consideration should be provided to the effects of inflation during the policy period. Most comprehensive buildings insurance policies include a ‘Day One’ inflationary provision. This provision provides protection against the effects of inflation during the period of insurance for a given percentage uplift figure. The percentage uplift will vary by terms agreed with insurers but typically can range anywhere between 10% and 50%.
Therefore, if your policy includes a 30% ‘Day One’ provision, you will have the benefit of an additional 30% allowance on top of your reinstatement cost declared, thus providing protection in the event of rising rebuild costs during the policy period and also mitigating the need to adjust your policy mid-term. Your policy schedule will commonly detail two values —one referred to as the ‘Buildings Declared Value’ and the other as the ‘Buildings Sum Insured’. The difference between the two is your ‘Day One’ protection. It is important to note that your ‘Buildings Declared Value’ must be accurate as of the start of the policy period, as the ‘Day One’ provision protects against inflation only; insurers still have the right to reduce a claim in the event of being underinsured as of ‘Day One’.
Ensure your policy has an ‘Underinsurance Waiver’
A comprehensive policy will also typically include a clause whereby underinsurance shall not apply providing evidence of a reinstatement valuation having been carried out by and/or under the supervision of a Royal Institute of Chartered Surveyors professional valuer at least once every three years and the Buildings Declared Value having been adjusted accordingly with an uplift applying in the intervening years to reflect prevailing inflation.
This clause can provide comfort that as long as its provisions are met, your insurer(s) cannot reduce their claims payment should you be underinsured and you will benefit up to the full value insured for.
This article has outlined some key areas of focus to help ensure you are in an optimal position to be adequately insured and avoid the major pitfalls around underinsurance. We would, however, always recommend engaging a qualified insurance professional, and should this article have raised any questions, we would be delighted to have a further conversation.