When buying a property we highly recommend that an insurance health check is undertaken before you commit yourself financially.
Before you buy
Buying a property is so often shrouded in secrecy, but advising your insurance broker in good time prior to exchange of contracts should form part of your pre-purchase check list before you are committed.
Insurance generally sits at the bottom of the to do list, how often do you only concern yourself with it when you have exchanged contracts or at completion. Wouldn’t you rather know in advance if your property is going to be difficult to insure which could create issues with your lenders and/or your tenants as:
- You may be buying a property from a substantially larger property owner than yourself, who may be able to negotiate highly competitive premium levels due to their bulk buying ability on their block insurance policy.
- Certain types of construction, poorly maintained properties, some occupations, bad claims experience, vacant properties and the location can all play a part in making your property unattractive and in the worst cases, virtually uninsurable to insurers.
When you Exchange Contracts
As soon as you exchange contracts, you immediately have a financial interest in the property, therefore it is important to make sure your valuable asset is insured to your satisfaction. Don’t forget, if there is a significant insurance claim between exchange and completion, the last thing you need are issues with the cover arranged. obtain details of the Vendor’s insurance arrangements prior to exchange so you can ultimately satisfy yourself that they are adequate at the very least.
You should always:
- ask for confirmation the vendor has paid their last renewal premium
- request that your interest as contracting purchasers is noted on the vendor’s policy between exchange and completion
- request a 3 year claims experience detailing those paid and outstanding
All clients of Aquilla benefit from a free and discrete review of the Vendors insurances and will identify matters which could be of concern and may require immediate attention.
Are you properly covered for your exposures as a landlord? Do not wait until you have a claim to find out if you are properly covered or not.
If your leasehold private dwelling (regardless if it is a house or flat), forms part of a multi-property development and it is insured under a common insurance policy for the benefit of all the residents, if you sublet your property, you need to check if your own risks as a landlord are covered by the resident’s policy.
In very much the same way that your own personal possessions will not be insured by such a block policy arrangement, the chances are that you will also not be covered for the following principle risks as a landlord:
- Your loss of rent/Alternative Accommodation
- Your Public Liability Risks as a property owner
If this is the case and in these circumstances, you need to arrange your own cover should you wish to be suitably protected.
You should speak to your insurer/broker to make sure your own risks are suitably catered for and with that in mind, it may be possible to extend your contents policy to provide the necessary cover.
Understanding Alternative Accommodation Cover – Keeping it simple
Essentially, Alternative Accommodation is an insurance cover provided under property owners’ policies (you should always check your policy to make sure you have the cover and limit you need). This insurance cover is designed to give the policyholder (being mindful of the above advice as to whether you/your leaseholder are covered), the benefit of being reimbursed for the cost of staying elsewhere whilst the private dwelling is being made habitable again following damage to the property by an insured peril e.g. fire, storm, flood, malicious damage and the like.
Policy wordings do vary from one policy to another, but in essence, insurers will usually accept to pay the reasonable Alternative Accommodation and storage of your furniture costs when your private dwelling is unfit to live in and/or access is denied. As a guide, insurers will not normally expect to pay if you have some staining to your ceiling or your hall carpets are damp, no matter how inconvenient it may be to you until you have the damage rectified.
As with all claims/matters of this nature, you need first check with your insurer/broker what you are entitled to before you pack yourself and/or your family off to your favourite five star hotel for a couple of months!
This document intends to simply act as an aide-memoir and you should seek the professional advice of your building surveyor and your insurance broker to ensure your specific requirements are properly attended to.
Getting your building sums insured right is important
Having a basic appreciation of what is required by your insurer is important towards making sure you provide them with the correct figure. Whilst qualified building surveyors will know exactly what is required by the insurance policy, it is still possible for the wrong figure to be provided.
For instance, the valuation you receive will usually not include VAT and this may need to be added to the sum you advise your insurance company, depending whether or not you can recover this.
Is your insurance policy on a “Reinstatement” or “Day One Reinstatement” basis?
The traditional method of insuring your building is on a Reinstatement Basis where the cost of repair is determined at the time of the loss as opposed to at the start of the insurance period. This will have likely increased during the policy period, therefore the selected sum insured must include an allowance for inflation as well as for the full re-building period.
As the loss could happen at the end of the policy year, this additional year needs to be taken into account on top of the anticipated re-building period to ensure an adequate amount of inflation has been considered.
If your policy is on the more common Day One Reinstatement Basis, the sum declared to the insurance company is how much it would cost to rebuild the property on the first day of the insurance period, excluding inflation. The potential effect of inflation on the re-building cost is catered for automatically by the policy as an additional percentage on the declared value usually up to 50%. Lower percentages can be agreed with insurers with a view to benefitting from premium savings.
Insurance brokers are not qualified to advise if the building value is adequate or not, but will be able to help advise if the calculation of the building value is in line with the policy covering the building.
What key elements usually go into calculating the declared value?
1. A re-building cost is applied to the gross area of the building to which all permanent fixtures and fittings and M&E plant owned by the policyholder is added.
2. To the figure calculated in “1” above, an allowance for the following is then added:
- Local Authority requirements.
- Debris removal.
- Professional fees.
3. VAT may also need to be added to the final figure and this will depend on two key considerations:
- If VAT cannot be recovered.
- Some insurance policies may allow VAT to be ignored, regardless of status.
The most common issues we come across where sums insured are inaccurate
1. Owners taking on the value the vendor insured without checking if it is correct or not.
2. The asset value being adopted as the reinstatement cost.
3. Allowing the building value to be index linked and unchecked year on year. The RICS recommend at least a desk top revaluation once in every 3 to 5 years.
Some insurers do offer an alternative to the employment of a building surveyor
A small number of insurers now offer a building re-valuation service as part of the policy cover although this facility is usually only available to property portfolios, rather than for stand-alone properties.
As a result of the Lord Justice Jackson Review on civil litigation and the Ministry of Justice (MoJ) consultation on the civil justice procedure, we have summarised the reforms and how they affect the handling of low value personal injury claims from April 2013. The Jackson reforms are in relation to the personal injuries legal framework focusing on the costs of civil justice in England and Wales as costs were often not relative to the issues.
As a result of this the intention is for the civil litigation system to benefit as follows:
- More proportionate lawyers costs.
- Assist in eradicating a compensation culture.
- Enable insurers to pass on savings to Policyholders through lower premiums.
- These current reforms which apply to the RTA have been extended to include Employers’ Liability (EL) and Public Liability (PL) personal injury claims as from August 2013.
- The government introduced an online portal system requiring Solicitors to report all Road Traffic Accident (RTA) Motor personal injury claims with a value between £1,000 and £10,000 in April 2010. This, together with revised management systems were designed to speed up the claims settlement and saw the introduction of strict timescales and fixed legal fees.
Summary of Changes
The RTA Motor personal injury limit was increased from £10,000 to £25,000 for all claims to speed up compensation payouts. The online portal system applies to all EL and PL personal injury claims up to a £25,000 limit as from August 2013.
However, there are some claims that will fall outside the portal and examples of these are:
- EL disease claims where there is more than one defendant.
- Mesothelioma (Asbestos) claims,
- Clinical negligence.
Once a claim has been notified liability must either be accepted or repudiated within the below timescales, failure to do so will result in the claim being dealt with under the current system (outside the portal system), and allows claimants to recover costs on an hourly basis:
- RTA 15 Days (no change).
- EL 30 Days (currently 90 days).
- PL 40 Days (currently 90 days).
A matrix of fixed costs apply depending on the size of the claim settlement within the portal system from August 2013. Solicitors fees for claims falling outside this process have also been revised to ensure claims are not pushed outside of the portal process for a financial gain from August 2013.
Qualified one way cost shifting is a new system that was introduced at the time which means that defendants always have to pay their own costs. There are exclusions to this which include:
- Fraudulent claims.
- If the claimant fails to beat the defendants pre-trial offer.
- Where there is no reasonable cause for action. From any damages awarded the claimants solicitors can charge up to 25% for success fees (which were previously recovered from the losing party).
Additionally, if claimants take out any After the Event (ATE) legal expenses cover this is no longer recoverable from the losing party. On cases where there is no conditional fee agreement in force, there will be a 10% increase in general damage awards to recompense the abolition of success fees.
In the event of a claim/or potential claim you will need to notify your insurance broker immediately, ensure that all information is accurate and any supporting evidence or documentation is complete and provided within the timescales. This will help streamline the flow of information on liability and quantum, enabling insurers to agree settlement quicker.
Significant Changes Affecting You
Referral fees have been banned. This prevents Solicitors from paying insurance and claims management companies for details of injured parties. Any MoJ forms received by you via the post must be forwarded to the insurers the same day, which will allow the insurer time to contact the claimant’s solicitors within the required timeframe. If you receive a claim notification form direct from the claimants’ solicitors you must acknowledge its receipt no later than the day after receipt.
Important Considerations For You
There is no doubt that the reduced timescales may cause issues for Managing Agents, Building Managers, Surveyors or Owners who are not on site at the time of the incident. Therefore in order to ensure that you are in the best possible position to defend any claims an increased emphasis should be given to ensure that management processes include:
- Accurate recording of any incidents when they occur.
- Immediate notification of all claims/potential claims to us.
- Investigations undertaken should be formally logged.
- Site visits recorded.
- Record keeping of inspections.
- Vetting of contract staff (cleaners/security).
- Formal contracts in place with contractors.
- Training records where required.
- Monitoring of visitor to properties.
- Risk assessments.
As if it isn’t bad enough that your precious property asset is unoccupied, but there are some matters you cannot ignore or take for granted.
Not adhering to your insurance company’s vacant property policy terms will likely have dire consequences when you next make a claim.
Insurers’ policy terms and condition are broadly similar from one to another. However they do and can vary, so when your property becomes vacant, you should check what your policy says to make sure you understand what is required of you.
A very brief outline of what you will likely have to consider are:
- Visit the premises with internal and external inspections (to be logged) at least every 7 days.
- Remove all combustible waste both externally and internally.
- Seal all letter boxes.
- Board up all accessible windows and doors.
- Turn off services.
Insurers will always be prepared to discuss specific issues you may have in complying with their policy terms and may relax their position.
- Always make sure the insurers are advised that your property is vacant as soon as you become aware.
- Always make sure that you are absolutely clear what is required of you until it becomes occupied again.
- If your policy terms and conditions are on a “recommendation basis” in relation to your risk management duties when your property is unoccupied, be absolutely sure what is specifically required of you. It does not mean you can be completely inactive or be selective with what you do.
Failure to comply with the insurer’s terms without their specific agreement will very likely result in the insurer refusing to pay your next claim.
In addition to the principle buildings, rent/service charge and liability cover, property owners will need to consider a whole range of other insurance products which include:
- Engineering (insurance and inspection contracts)
- Employers Liability
- Contract Works
- Loss of Other Income (other than rent)
- Latent Defects
- Environmental Impairment
- Legal Contingencies
- Excess Liability
Aquila’s team of Property Owners insurance experts will be able to discuss the numerous products available to including your corporate insurance requirements and will work with you to find the right solution for your specific need
In an ever increasing litigious society, prudent property owners will be well advised to obtain adequate levels of third party liability insurance. The limit of liability (or Limit of Indemnity), insured is something that will need to be calculated with careful consideration and will ultimately be a balance between:
- What limit is realistic or sensible
- How much of the premium can be justifiably recovered
- How much non-recoverable premium is the Policyholder prepared to pay
There is no right or wrong limit and can vary dramatically:
- From one property to another
- Depending on the location
- Depending whether or not it is a public place
- Depending how densely populated the surrounding area is
The Policyholder’s contract works at the premises covered by the policy up to specified limits are commonly automatically covered by the policy. Whilst this is very useful for reducing the administration for smaller works, it is important to be fully aware of the limits as larger contracts will need to specifically insured.
This clause provides cover when a Tenant does not pay their rent because they cannot access their premises due to damage within the building. A Non-Damage extension can be offered to provide added protection where access is denied as a result of damage elsewhere.
The policy offers cover to protect rental income (both actual and anticipated), where under terms of the lease/license/agreement, the Rent Cessor kicks in if the Tenant cannot occupy the premises in full or part as a result of an insurance claim.
The Policyholder will need to properly assess how many years loss of rent could be incurred by them following a complete loss. Most landlords will rely on the number of years detailed in the lease, but it should be appreciated that the lease will normally reflect the number of years it is expected to rebuild the property. What the lease does not generally cater for, however, is much longer after the property is ready for occupation it may then take to get the income stream back to what it was before the loss.
The additional premium for this extra cover may not be recoverable from the Tenant, but it should not deter the landlord from considering the appropriate protection they require at the very least.
This part of the policy can also can also cover the Landlord’s loss of service charges and should this be required, the sum insured should reflect these additional losses.
Effectively, this provides the full cover offered by the policy for the premises owned by the Policyholder on a contingency basis where their Tenant is, Superior Landlord or other party arranges the insurance for the property under the terms if the lease/license/agreement. This clause usually requires the Policyholder to carry out an annual check of the third party’s arrangements.
It is worth mentioning that where a third party is responsible for arranging the insurances for the buildings, the Policyholder will still need to consider what other potential exposures they may still have that will not necessarily be covered by the third party’s arrangements.
If a property is inadvertently omitted from being added to the policy, cover is still automatically provided subject to specified terms.
A vacant property usually poses a significantly increased risk to the insurance company.
Insurers may still offer cover but may want:
- An increased premium, or
- An increased excess, or
- Reduce the cover they would otherwise normally provide, or
- A combination of all three options
In return they will usually require that the premises is at least:
- Regularly inspected
- Boarded up, and
- The services turned off
It is critical for the Policyholder to clearly understand what is required of them when a property is unoccupied, as ignoring these terms may lead to a claim not being paid.
This clause allows Third Parties who may have a legal right, to be named on the policy, without being specifically noted. The benefit of this clause, especially where the policy covers numerous properties and Tenants, is purely administrative and ensures honest mistakes do not compromise the respective interests of the various parties involved in the property.
A basic right of every insurance company is for them to be able to attempt to get their money back, following payment of a claim (know as Subrogation), from the Third Party responsible for the damage.
Tenants, especially those who reimburse their Landlord for their premiums for the insurance policy providing cover for the buildings they occupy, find themselves in a potentially precarious position as they could be “unfairly” penalised (particularly if they are not named in the policy), by an insurer seeking redress from damage that may have been caused by them.
This clause effectively means the Insurer cannot subrogate against the Tenant unless the damage has been purposefully or intentionally caused by the Tenant.
Essentially, this clause gives peace of mind to the Policyholder in the knowledge that if a Third Party (e.g. the Managing Agent or Tenant), does something that could invalidate the policy and the Policyholder is unaware of this “error”, cover should not be affected. This clause works on the provision that as soon as the Policyholder becomes aware of the position, they advise the insurer immediately.
This clause effectively removes the condition of Average from the policy (whereby the insurer can proportionally reduce the claim if the sum insured is inadequate). The clause usually requires a re-valuation of each property covered at least every 3-5 years and is more likely to be offered by an insurer where the policy covers several premises.
Depending on the insurers wording, the Policyholder may not have to include VAT in the reinstatement valuation, regardless if this can be recovered or not.
The “Day One” basis of cover is the usual way of insuring buildings and this simply means that the building reinstatement value (known as the Declared Value), should exclude any provision for inflation. Inflation is automatically catered for by the policy.
A policy issued on a “standard” reinstatement basis, on the other hand, will require the building reinstatement value (Sum Insured), to include an allowance for inflation for the anticipated duration of the reinstatement period following a claim. When making this calculation, consideration that the loss may occur on the last day of the policy year is advisable.
In normal circumstances, the insurance will provide cover for the full reinstatement of the buildings and fixtures and fittings belonging to the policyholder. The sum insured provided to the insurance company must reflect the actual cost of rebuilding the property as it is. The policy will also provide protection to cover the additional costs potentially incurred by the Policyholder holding following a claim for:
- Professional fees
- Debris removal
- Potential increased costs imposed by the local authority
In order to ensure these extra specific costs are covered, an allowance for each must be included in the reinstatement valuation provided to the insurer.
VAT must also be considered in the reinstatement valuation. Whether VAT is included or not will be dependent if this can be recovered by the policyholder or not and also on the terms of the policy.
A professional reinstatement valuation by a competent building surveyor would be viewed as good practice and it is recommended that a re-evaluation is undertaken every three to five years. Index linking should otherwise be adopted at each renewal of the policy between valuations. This practice is recommended by the RICS.
There are times when it is inappropriate or impossible to ensure the building for the full reinstatement value or for the widest cover, which may be considered in choosing the right insurance policy.
An “All Risks” policy principally offers cover for an identifiable incident which causes damage or results in a loss.
Despite what could be read into the ” All Risk” label, the cover provided does have a number of exclusions and restrictions and these vary from one insurer to another. The only way to truly identify what is not covered is to look at the finer detail of your policy. In particular, terrorism is excluded and will need to be purchased separately if this is required.
It is also worth noting that as a general rule, the insurance company will expect the property to be kept in a good condition and maintained to an acceptable level.
All insurance companies offer insurance protection in “absolute good faith”, based on information provided to them and a duty of care by the Policyholder. This ultimately puts the onus on the policyholder to advise the insurance company of any material fact that could affect the cover provided.
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