Are your building sums insured calculated correctly?
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.