Many building owners assume that their insurance policy provides adequate coverage in the event of a disaster. However, this is not always the case. Insufficient insurance coverage can lead to significant financial losses and even bankruptcy, losing your home, or business. It is crucial for building owners to regularly review their insurance policies to ensure that they have adequate coverage.
There are several factors to consider when determining whether a building is adequately insured. These include the value of the building, the rebuild cost (aka, the replacement cost), and the potential risks and hazards in the surrounding area, but most importantly, the building’s Sum Insured must be adequate to demolish and rebuild the building in the case of a total loss.
Building owners should also consider the type of insurance coverage they have, such as property insurance, liability insurance, and business interruption insurance. By taking these factors into account, building owners can ensure that their insurance policy provides sufficient coverage in the event of a disaster.
Understanding Building Insurance
Building insurance is a type of insurance policy that covers the cost of repairing or rebuilding a property in case of damage or destruction. It is an essential insurance for any building owner or landlord.
A buildings insurance policy typically covers damage caused by fire, flood, water, storm, earthquakes, vandalism, and other unforeseen events. The insurance company will pay for the cost of repairing or rebuilding the building, up to the policy limit or sum insured.
It is important to note that buildings insurance does not cover the contents of the building. Contents insurance is a separate policy that covers the cost of replacing the contents of the building, such as furniture, appliances, and personal belongings.
When purchasing buildings insurance, it is important to work with a reputable insurance company or broker. They can help you understand the coverage options and policy limits that are available.
Some important factors to consider when purchasing buildings insurance include:
- The location of the building: Buildings located in areas prone to natural disasters, such as floods or earthquakes, may require additional coverage or be excluded, on occasion.
- The age of the building: Older buildings may require more coverage due to the higher risk of damage.
- The type of building: Different types of buildings, such as commercial or residential, may require different coverage options.
- The construction type: the materials and type of construction can sometimes exclude the building under certain policies, or require extra disclosure.
- The reinstatement value: The policy limit/sum insured should be sufficient to cover the cost of demolishing and rebuilding the entire building and all associated costs.
Assessing Adequate Coverage
Assessing whether a building has adequate insurance coverage is crucial to ensure that the building owner is protected from unforeseen financial losses. It is important to understand the different types of coverage available and the level of coverage required for the building.
Building coverage is essential. It provides protection for the physical structure of the building and in many cases, its fixtures and fittings (tenants are sometimes responsible for their fixtures and fittings, commonly in say, a retail setting). It is important to ensure that the building’s coverage is sufficient to cover the cost of demolishing and rebuilding in the event of a total loss.
In addition to building cover, building owners should also consider other cover such as liability, business interruption (or loss of rent), and equipment breakdown cover.
- Liability cover protects the building owner if someone is injured on the property.
- Business interruption cover provides coverage for lost income if the building is unable to operate (or be occupied) due to a covered loss.
- Equipment cover provides coverage for the repair or replacement of equipment that is essential to the operation of the building.
To assess whether a building has enough coverage, building owners should consider the following factors:
- The value of the building and its contents
- The potential cost of rebuilding the building in the event of a total loss
- The risks associated with the building and its location
- The potential cost of liability claims
- The potential loss of income due to a covered loss
It is important to review insurance policies regularly to ensure that they are up-to-date and provide adequate protection. Building owners should work with their insurance brokers to assess their insurance needs and determine the appropriate level of coverage.
The Association of British Insurers has commissioned a tool – the Building Cost Information Service (BCIS) which intends to provide general guidance to help check the cost of rebuilding houses and some kinds of flats, and in turn, the adequacy of their sum insured/policy limits. This link will take you to that tool https://abi.bcis.co.uk/
Owners of commercial buildings should seek professional advice from a broker or even a Quantity Surveyor if they are unsure that the sum of their buildings insured is adequate.
Determining Replacement Costs
When it comes to insuring a building, determining the actual cost of reinstatement is crucial. Reinstatement cost is the amount of money needed to replace the entire property with materials of similar kind and quality to the original, taking into account current demolition costs, construction costs and rebuild costs.
Property owners should ensure that their policy includes an accurate sum insured, which is the maximum amount that the Insurer will pay out in the event of a claim. Failure to insure for the correct amount can result in underinsurance and leave the property owner responsible for covering the shortfall. We will address this in more detail, later in the article.
To determine the replacement cost, property owners can enlist the help of a broker, chartered surveyor, or professional evaluator who can assess the property to conduct a thorough reinstatement cost assessment and provide an estimate of the cost of materials, labour, and professional fees required for new construction. Evaluations should take into account the current cost of building materials and the costs of construction in the local area. Again, the BCIS tool can sometimes assist with this task https://abi.bcis.co.uk/
It is important to note that the reinstatement cost is not the same as the market value of the property. The market value takes into account factors such as location, demand, and the condition of the property, whereas the reinstatement cost is solely focused on the cost of demolishing and rebuilding the property.
Property owners should also take into account the cost of inventory and any other property that would need to be replaced in the event of an insurance claim. This can include furniture, fixtures, and equipment.
Addressing Under-Insurance
Underinsurance is a common problem that can have serious consequences for property owners. It occurs when the reinstatement value of a building is not accurately reflected in the insurance policy. In the event of a claim, this can result in the business owner receiving less money than they need to cover the cost of repairs or rebuilding. If you are underinsured, your Insurer will likely apply an ‘average’ clause to your claim payment.
What Does ‘Average’ Mean In Insurance Claims?
In cases of under-insurance, the Insurer may choose to ‘apply average’ to the claim under a policy’s average clause. This usually means reducing the claim in line with the proportion of underinsurance. So, if the Sum Insured is £60,000 but should have been £100,000, the insurer will pay 60% of the claim value.
One common misconception by the general public here is that if your policy covers you for £60,000 as in the above example, but you are under-insured, an average will be applied to ALL claims, so you are not covered up to the policy limit.
To explain further, in the above example, if there was a claim for £1,000, the average would be applied and the claim paid at £600, even though a policyholder may think that they simply have ‘cover’ up to an amount of £60,000.
To avoid underinsurance, it is important to make sure that the building is insured for its full reinstatement value.
Another way to address under-insurance is to review the insurance policy regularly. This can help to ensure that the policy is up-to-date and reflects any changes that have been made to the building. For example, if the building has undergone renovations or additions, the policy may need to be updated to reflect these changes.
Property owners should also consider the level of cover they need to provide peace of mind. While it may be tempting to opt for a lower level of coverage to save money on premiums, this can leave them vulnerable. It is important to strike a balance between cost and coverage and to ensure that the policy with competitive premiums provides adequate protection for the building and its contents.
Risk Factors and Coverage Types
When it comes to insuring a building, there are many risk factors to consider. Buildings can be damaged or destroyed by fire, vandalism, theft, burglary, floods, and many other causes. It is important to understand the different types of coverage available to ensure that your building is adequately insured.
Fire
Fire is one of the most common risks that buildings face. It can cause significant damage to the structure, as well as any contents inside. Most insurance policies will cover damage caused by fire, but it is important to check the policy to ensure that it provides adequate coverage.
Vandalism and Theft
Vandalism and theft can also cause significant damage to a building. Insurance policies may cover damage caused by these events, but it is important to check the policy to ensure that it includes coverage for these risks. Most policies will apply strict (and small) limits under this type of claim and therefore if a policyholder owns specific items that are at risk of theft or vandalism, they should speak to their broker about a specialist policy for these specific items. You should also look out for ad-hoc policy conditions or endorsements relating to security requirements, as a failure to meet these conditions can instantly result in a claim being refused.
Floods
Floods can cause significant damage to a building, and some insurance policies do not cover damage caused by floods. It is important to check the policy to ensure that it includes coverage for this risk.
Some properties are simply unable to obtain flood cover due to their location or other factors.
Some properties can obtain flood cover under special conditions, such as the presence of a large excess. This means that small claims (any claim with a value lower than the excess) will effectively be covered by the policyholder and not the insurance company
Additional Property Considerations
When it comes to insuring a building, there are several additional property considerations that one should keep in mind. These considerations can help ensure that the building is adequately insured and that the owner is protected in the event of any unforeseen circumstances.
Other Considerations
Several other property considerations should be taken into account when insuring a building. These can include:
- Landscaping: If the building has any landscaping features, such as trees or shrubs, their value should be considered when determining the insurance policy. Policy limits on these items should also be checked.
- Fixtures and Fittings: Fixtures and fittings, such as light fixtures and built-in shelving, should be included in the insurance policy.
- Inventory: If the building is used for commercial purposes, it is important to ensure that any inventory is accurately reflected in the insurance policy.
- Construction: is it a listed building, does it have a flat roof, is it near a watercourse? These questions will usually be asked when you take out the policy and should be checked to ensure accurate information is given.
By taking these additional property considerations into account, building owners can ensure that their property is adequately insured and that they are protected in the event of any unforeseen circumstances.
Financial Implications of Being Under Insured
When it comes to property insurance, the financial implications of being underinsured can be significant. In the event of a total loss, the cost of repairing or rebuilding can be substantial, and if the property is not adequately insured, the owner may be responsible for covering the difference.
Premiums for property insurance policies are determined by several factors, including the location and age of the building, as well as the value and reinstatement cost of the property. While it may be tempting to opt for a lower premium, it is important to consider the potential costs of being underinsured.
In the event of a loss, the Excess is the amount that the policyholder is responsible for paying before the insurance coverage kicks in. It is important to choose an Excess that is affordable, but not so high that it would be a financial burden in the event of a loss.
Repair costs can also be a significant factor to consider. Depending on the extent of the damage, repair costs can be quite high, and if the property is underinsured, the owner may be responsible for covering the difference.
INFLATION
Inflation can also impact the cost of repairing or rebuilding a building, so it is important to take this into account when setting coverage limits and Sums Insured.
The Role of Industry Trends
In the construction industry, trends are constantly changing, and building owners must keep up with these changes to ensure that their buildings are adequately insured. A building owner may not be aware of these trends until they affect their claim.
Construction industry trends can affect the cost of insurance coverage and reinstatement costs, and building owners may not be aware of these trends, again, until it affects them. For example, if there is a trend of delays in construction projects, a labour shortage, or an increase in the price of materials, insurance companies may increase the cost of coverage for buildings under construction. All three of these issues are affecting the insurance market in the U.K. at the time of writing. All three of these issues can also affect the reinstatement costs, and therefore render a building underinsured.
Surveyors play an essential role in determining the value of a building, and their assessment can affect insurance coverage. Building owners may not be aware of the trends in the surveying industry and therefore if there is doubt, the advice of a professional should be sought.
Overall, building owners that stay informed about industry trends and consider the specific needs of their building when choosing insurance coverage, hold an advantage when attempting to ensure that their building is adequately insured.
If you would like to speak to an expert about this or any other aspect of your claim, call our free Property Claim Helpline on 0800 002 5819, for a no-obligation consultation.
Disclaimer
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