A community broker with a national reach, Jelf Insurance Brokers provides insurance advice and risk solutions to businesses and individuals, offering comprehensive solutions within the industries and communities in which we operate. Here Jelf offers some guidance on how to get an accurate valuation and avoid under insurance.
Guest article: Jelf Insurance Brokers
While every property owner has an interest in ensuring that the reinstatement or rebuilding value of every property they own has been assessed, the fact is that many buildings are underinsured in terms of reinstatement costs. This may not bother some property owners and landlords in the short term, as being underinsured obviously means that they pay lower premiums, and everyone likes to save themselves money.
However, when a major problem does arise, the impact of an insurer applying what is known as ‘average’ to the claim will generally make them reconsider that view. To put that in its simplest terms, if the actual reinstatement cost of a building is £2m, yet the insured value is £1m, the insurers will be quite within their rights to impose a ‘proportionate settlement’ for any claim: meaning that as the property was underinsured by 50%, a valid claim for £200,000 worth of insured damage would only lead to an insurance payout of £100,000, leaving the property owner substantially out of pocket.
While in the short term this could mean property owners pay lower premiums, in the long term under insurance can be a serious problem for the lenders as well as commercial landlords. Yet it is a common situation for a number of reasons.
We recently asked Martyn Barrett of surveyors Barrett, Corp and Harrington (BCH), specialists in providing insurance valuations (reinstatement cost assessments), for his thoughts on one of the reasons behind the prevalence of underinsurance. He told us:
“First and foremost, when assessing the value of commercial buildings for financial institutions, a valuation surveyor’s primary responsibility is to assess the market value, thus ensuring that in the event of a building being repossessed, the value will enable the lending institutions debt to be discharged.
“Giving an indicative insurance reinstatement value, although important, is therefore the secondary purpose of the valuation. This figure may not always be assessed in sufficient depth. A significant reason for this is that in the case of commercial buildings, valuation surveyors may base their assessment on their own average prices or those published by the Building Cost Information Service (BCIS) provided by the Royal Institution of Chartered Surveyors (RICS). In those cases it is common practice to calculate the square meterage of the building and multiply it by the average price for this type of building. This method alone, cannot account for financially significant factors such as a building having listed status, or being built of unusual materials and the provisions of the buildings definition within insurance policies”
What can a property owner do in order to minimise the risk of being underinsured?
“Above all, it’s important to read the valuers report in full. The majority of practicing valuation surveyors will state in their report that a full Reinstatement Cost Assessment (RCA) has not been undertaken and that the reinstatement value given is therefore an indication. They will also attach other reasonable caveats to the valuation, in order to draw any other pertinent factors that would affect reinstatement costs to the attention of the lender and the client.”
“Should the worst happen, a court of law may not find against the valuation surveyor, even where the indicative reinstatement cost is found to be significantly wide of the mark. It is worth noting that these discrepancies can be substantial.”
“In one recent instance, we saw a valuation surveyor’s report give a market valuation of £3.5m and an indicative insurance reinstatement valuation of £7m for a Listed Building. But following our instruction, we calculated the full cost of reinstatement to be £20m. By insuring at the correct amount the client has avoided a potentially serious case of under insurance had the premises sustained a significant major incident at some point in the future, as clearly their insurer would have applied average to any claim at that stage, had they gone with the £7m valuation. Correct assessment enabled the client to avoid a potentially very serious case of under-insurance that would have led to a massive financial loss had their insurer applied ‘average’ to a substantial claim.”
How to Avoid the Pitfalls of Underinsurance
At Jelf, we have a clear understanding of the perils of reliance on ‘indicative reinstatement’ costs that are contained within valuations commissioned for clients and their financial institutions; so we strive to offer best advice to help every client to avoid inaccurate property valuations for insurance purposes.
Naturally, that means ensuring that an accurate, expert Reinstatement Cost Assessment is made at the outset, taking into account all factors relevant to that building in the context of its location, and the client’s financial interest and responsibilities in the building. Yet it also means ensuring that our clients seek regular reinstatement cost reviews, at least every three years, in order to avoid ‘average’ being applied to any claims they might have to make in the future.
Reviews every three years are also recommended by RICS, and this helps to avoid cases of under insurance slipping through the net. A programme of review is highly recommended by Jelf, as we are aware that significant under-insurance exists, and want to provide the best advice and the most complete possible protection for their clients.
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