At a glance
- Underinsurance is a persistent problem in the UK, with a significant proportion of properties thought to be underinsured
- Misunderstandings over how to calculate reinstatement values and a lack of professional valuations are some of the main causes of underinsurance
- Our interactive infographic shows the range of factors influencing a building’s reinstatement value, and why organisations need regular professional valuations
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Up to 80% of the UK’s commercial properties could be underinsured, with average shortfalls of 60% per property, according to estimates by the Building Cost Information Service (BCIS).
Underinsurance can cause claims settlements to be proportionally reduced, resulting in customers not receiving a full indemnity following a loss. Inadequate property settlements can then go on to further impact a business, such as its ability to continue trading.
A number of factors are thought to be causing such high levels of underinsurance, in particular, a lack of understanding of how to calculate reinstatement values, and infrequent professional valuations.
These same factors can also regularly lead to overinsurance, causing customers to pay more for their buildings cover than is necessary.
This interactive guide (click on the icons to reveal) is designed to help you and your customers understand the range of factors that influence a reinstatement value, and why regular professional valuations should be carried out.
Terraced and semi-detached properties will often share ownership of their adjoining walls, which can have implications for reinstatement valuations.
Appropriate allowances need to be made depending on how the party wall would be treated in the event of a loss – for example, any impact on the cost of demolition and protection works.
What your customers are responsible for insuring can vary greatly. For example, it may be ‘shell and core’ only, or also include fixtures and fittings (such as carpets, kitchen units, lighting and storage racking).
Valuations can vary significantly depending on the extent of fit-out to be included. Knowing exactly what to include is therefore essential for avoiding underinsurance.
Whether to include VAT in a valuation is not straightforward. Some aspects of a reinstatement will attract VAT, while others will not.
With VAT currently rated at 20%, misapplying it can significantly impact a valuation. Applying VAT correctly will usually require professional advice from a surveyor to arrive at an accurate figure.
A common mistake during valuations is to only consider the building, and to forget to include external works, such as driveways, boundary walls, drainage, lighting and landscaping.
Anything within the site’s boundaries, or which falls under the policy wording’s definition of ‘buildings’, needs to be included in the reinstatement value, and often requires specialist knowledge from a surveyor to value correctly.
A reinstatement value needs to include the costs of demolition, waste removal and protection to surrounding properties.
These costs are very subjective to each building. For example, a terraced property may require additional work to protect adjacent properties, or the site may have restricted access, making demolition and the removal of waste more costly.
Any changes to a property – whether building an extension, or simply redecorating – will affect its reinstatement value. Index linking will not take into account the effect of these changes, and over time it is easy for many small alterations to have a large cumulative effect on a reinstatement value.
For this reason, it is important to conduct regular professional valuations, and always to have a property re-valued following any significant changes.
A number of materials used in buildings are considered contaminants. Working with contaminants requires special action to be taken, and can add significant cost to a rebuild.
Asbestos is a well-known contaminant, which demands specialist removal and disposal. However, even substances such as lead paint will attract additional cost and need to be accounted for during a reinstatement valuation in order to avoid underinsurance.
Period features – both internal and external – can make a significant difference to a reinstatement value. If the building is also listed, it is required by law to be reinstated exactly as it was, down to the smallest details. If traditional building techniques are needed to achieve this, then it is likely to require specialist trades and materials, adding significant additional expense.
Features, such as location, or what surrounds a property, can greatly impact a reinstatement value.
For example, if it is on unstable land or near a watercourse then very different foundations could be required to those of a standard property, which can significantly alter a reinstatement value. Access to a site also needs to be considered – if access is restricted then specific machinery, such as cranes, may be required in order to carry out any reinstatement works.
A reinstatement value needs to consider the cost of complying with the latest building regulations. With new regulations being continually introduced – to address issues such as fire protection, disabled access and energy efficiency – reinstatement values can quickly become outdated.
Regular professional valuations are therefore needed to account for any changes in building regulations since the last valuation.
Many aspects of a valuation will depend on a building’s location. For example, a building in a remote area will require additional travel time for construction staff, while a building in Central London may pose issues of accessibility.
Material and labour costs can also vary significantly across the UK, which will need to be accounted for to achieve an accurate reinstatement value.
Reinstatement values need to include associated costs of demolishing and rebuilding a property. This will include everything from hiring an architect to paying local authority planning application costs, which can vary regionally.
How we can help
Our Real Estate policy will not apply an average clause if professional valuations are undertaken at least every three years by a RICS qualified surveyor.
In addition to preventing underinsurance, a professional valuation can also help reduce an organisation’s business costs – for example, by identifying more energy efficient measures (such as those prescribed by the Energy Act 2011) and any corresponding tax allowances.
For more information on arranging a professional valuation with one of our surveyor partners, or to discuss anything raised in this article, please speak with your local Zurich contact.
Your can also access helpful guides and insight with our new Underinsurance, Fire and Flood Risk Resources.