The term underinsurance might not be one that’s familiar to you, but it’s a significant issue in our industry. In our latest blog, we tell you what it is, why it’s an issue and who needs to be aware of it.
What is underinsurance?
In a nutshell, underinsurance is the provision of inadequate sums insured by the holder of an insurance policy. When you take out a renovation insurance policy, you are required to confirm the ‘rebuild’ value of the property (and any contents) that you want to insure along with the ‘contract value’ – a figure representing the total cost of the project to you. These figures are known as “the sums insured”. It’s important that the sums insured are correctly assessed.
In some cases, whether deliberately or not, the policyholder will declare a rebuild cost and/or a contract value which is lower than it should be. When this occurs, we call it underinsurance.
In the event of any claim, the confirmed sum insured value is what an insurer will pay out against. If that sum has been significantly underestimated, the claim pay out will be significantly reduced too. And in situations where the sums insured are grossly inadequate, the insurer is actually entitled to void the policy altogether.
We work very closely with brokers and renovators every day to identify the correct sums insured for new renovation projects; removing the very real risk of underinsurance. If we work with you, here’s what we’ll run through with you:
Building Sum Insured
We can guide you on the rebuild cost for a property in the event of a catastrophe. This figure is not the same as the ‘market value’ because the market value includes the price of the land your property sits on and other factors such as curb appeal.
- Rebuild values are generally lower than market values for the reason stated above, but in the case of listed property, particularly Grade II* and Grade I, the reinstatement costs per square foot can be so high that the rebuild cost actually outstrips the market value.
- We include VAT on the rebuild cost. Although new builds don’t attract VAT, most losses are only partial losses and, in these circumstances, VAT is applicable to the reinstatement costs.
- The rebuild cost for a property can often be found on existing schedules of insurance, mortgage paperwork and/or formal building surveys. But bear in mind that, particularly in the case of existing schedules of insurance, there is no guarantee that the figure is correct. Additionally, if the documents referred to are more than a couple of years old, the figures are likely to be out of date.
- Failing any of these, a rough idea can be gained by inputting a property’s square footage and postcode into the Building Cost Information Service (BCIS) from the Royal Institution of Chartered Surveyors (RICS).
- If additional help is needed, we’d advise the instruction of a professional valuation, which would usually be around a few hundred pounds plus VAT for a standard property. Though this cost may stick in the throat, it will seem like money well spent when compared to the financial consequences of underinsurance.
Works Sum Insured
In a large scale renovation, a property owner or developer will be responsible for a number of costs and fees. We insure the total works sum – the total cash cost to the client – which should include:
- the value of the main contract
- the value of any subsidiary contracts
- associated professional fees
- direct purchases (such as bathrooms, kitchen, fittings etc.)
- VAT where applicable
What happens if a renovation project is underinsured?
If a property owner or developer is in the unfortunate position of having to put a claim in for loss or damage to a property and/or the works themselves and there’s not enough insurance, there are going to be some serious financial implications.
Underinsurance is generally discovered when the loss adjuster appointed by the insurer turns up on site to assess the loss. He or she will, as a matter of course, and early on in the process, assess the adequacy of the declared sums insured.
If a property is found to be underinsured, the pay out for a claim is reduced in proportion to the percentage of underinsurance. For example, if a building is insured for £800k and it should have been insured for £1 million, then it is 20% underinsured. A claim for £10k would therefore be settled at £8k. A £2k shortfall that the insured is responsible for.
In the event of a large scale loss, a claim pay out may not cover the total cost of any rebuild, leaving the policyholder personally responsible for picking up the shortfall at a time of great disruption. Even worse, a large shortfall of funds made available in the claim pay-out may even leave the policyholder unable to complete the project.
Underinsurance isn’t something to be swept under the carpet. If a policyholder is underinsured, and attempts to make a claim, they will be found out. Make sure the property is adequately covered from the outset.
If you are looking to undertake a large scale renovation or are involved in a client’s renovation project, contact Renovation Insurance Brokers to discuss the insurance requirements. As the market leader in the sector, we are experts in placing renovation insurance. We’d be delighted to help you with yours.