How does underinsurance occur?
When a building insurance policy is taken out, the property owner is asked to provide the ‘building sum insured’ or rebuild cost. If this is not accurate and is lower than the actual cost to rebuild the property, the policyholder will be underinsured.
Most insurance policies require the owner of a property to state the correct value for rebuilding it, at the time of completing an insurance proposal.
The rebuild value forms part of the contract for insurance. The policy premium calculated by the insurer, is largely based on this figure at the outset and at subsequent renewals.
The Importance of Correct Insurance Values
If the rebuilding cost stated in the policy is found to be adequate at the time of claim and the claim is covered by the policy, it will be paid in full.
However, if underinsurance is discovered, then it is likely that the claim pay-out will be reduced, potentially proportionately.
With a large loss, the financial impact could be catastrophic to the Insured, leaving them unable to fully fund the rebuilding of the property, from the proceeds of reduced payment under the policy.
To put this into context, in 2020, BCH surveyed 1600 commercial and residential properties and found that 80% of them were underinsured.
If any of these properties suffered significant damage, the property owners would have been faced with a huge financial loss.
Typically, the more complex and unique the property, the tougher it is to estimate the rebuild value and what may have been the correct figure 10 years ago, is unlikely to be the case now.
How A Reinstatement Cost Assessment can help
Arranging a Reinstatement Cost Assessment (RCA) for your property will remove the guesswork and ensure you have an up-to-date building insurance valuation for your policy.
Most property owners have an idea of the market value of their buildings. However, rebuilding costs for insurance purposes are very different.
An RCA undertaken by a professional Building Insurance Surveyor will take into account the cost of rebuilding the main property itself and also the other structures and features which combined, make up the insurance policy definition of ‘buildings’.
This usually includes outbuildings and permanent external features, along with demolition and debris removal, professional fees and VAT where appropriate.
In the case of a suburban block of flats, external features may include costly extensive retaining walls – defining a parking area with lighting and security gates.
A historic or listed building, for example may have items, such as York stone paving, brick garden walls or a range of outhouses, which may not have been taken into consideration.
At BCH, we find that most property is underinsured. Having an RCA takes the speculation out of setting insurance rebuild values and gives a policyholder ‘peace of mind’ that when a valid claim is made, the insurance policy pay-out will be in full and not be reduced because of the discovery of underinsurance.
The worst time to discover underinsurance is at the time of a claim. The best time to act is when you are reviewing your insurance arrangements.