Avoid Underinsurance - Protect Your Property
The sharp increase in the cost of materials, inflation, and supply chain issues are all combining to create a perfect storm for underinsurance and your properties.
- According to the Builders Merchants Federation the price of construction materials has increased by between 10-20% this year, and some materials such as timber have increased by over 35%.
- Spiralling energy costs are likely to continue this upwards pressure on materials costs.
- Compounding this issue is increasing inflation across the UK, which at the time of writing was calculated to be 7.9% by the Office for National Statistics - the highest rate in over two decades.
- Transportation costs are up by 33% in the last two years.
- Construction companies are experiencing extended labour shortages due to the combined effect of Brexit and the pandemic.
What is underinsurance?
One thing to note is that insurers are not concerned with the market value of a property, they will always ask for the rebuild cost, which is not always the same and must include the cost of outbuildings and paved driveways and yards. In addition, there are professional fees such as architects and surveyors which can add up to another 20% to the rebuild cost.
Underinsurance on property insurance applies where the sum insured is lower than the actual rebuild value of a property. If this is found to be the case during a claim then insurers will apply "average" and will proportionally reduce the claim settlement based on how far the property is underinsured.
For example, if a property is insured for £500,000, but on review it is determined that the rebuild value is £750,000 then the property is underinsured by 33% and so any claim payments made for the building will be reduced by 33%.
This applies even if the claim is not for a total rebuild of the property and the value of the claim is below the sum insured - so if in the above example the claim is for repairs to a storm damaged roof with a repair cost of £20,000, insurers would reduce settlement by 33% and only pay £13,400.
How can I avoid being underinsured?
The short answer is simply to increase your buildings sum insured above the rebuild cost, however in practice this isn't a simple exercise unless you are a qualified surveyor!
It is recommended that you carry out a rebuild cost assessment every three years to ensure the rebuild cost is adequate. This might be something carried out on your behalf by a mortgage company if a mortgage exists on the property as they have an interest in ensuring assets that they are financing are adequately insured.
If this isn't the case, it is possible to arrange either desktop or on-site rebuild cost assessments and we have access to discounted rates with a RICS-qualified surveying consultancy if you would like us to put you in touch with them.
There are other resources available online which may assist you in calculating an accurate rebuild value. For standard brick-built residential properties you may be able to use the Building Cost Information Service's house rebuild value calculator to provide an accurate value.
Listed buildings will generally carry higher rebuild values and if you are unsure if your property is listed or not this can be checked on the Historic England website.
If you wish to arrange a desktop or on-site rebuild assessment you can let us know and we can facilitate this for you. If you'd prefer, you can source your own chartered surveyor through the Royal Institution of Chartered Surveyors.