Often, when considering an accurate Building sum insured for your commercial premises it can be difficult to arrive at a figure. Sometimes the amount for which you are currently insured has been based on an historical valuation index linked (in line with inflation) over the years. Whilst on the face of it this may seem acceptable, the importance of arriving at the correct sum insured should not be overlooked, particularly as recent research has shown that over 90% of buildings in Britain are not adequately insured. *
Properties can also be over-insured (about 20%) but it is increasingly common for buildings to be under-insured. In fact, on average over 65% of property owners are insuring for only 60% of the actual rebuild value.*
So why is this important?
Firstly, we need to clarify what insurers mean by the term ‘rebuild’ value. Whilst you may know how much your property is worth were you to sell it, this is not the figure insurance companies need. What they actually want to know is how much it would cost to rebuild your entire property from the ground up (should it be destroyed in a fire, for example) which needs to include additional costs such as site clearance, architects fees, specialist material disposal, additional wages, access to site and any bespoke or niche building supplies. This figure will be significantly different to your retail valuation.
Insurers use the rebuild figure so that your premises can be reconstructed as it was prior to the loss, known as a reinstatement settlement basis.
So again, why is this important?
If your property is under-insured, i.e. the sums insured are not adequate to rebuild your property (including construction and additional costs) then a condition known as ‘average’ operates. ‘Average’ adjusts your claim settlement amount in line with your level of under-insurance as per the following example:
- Building A is insured for £80,000.
- Building A burns down and needs to be rebuilt. The actual cost of rebuild is £100,000.
- Building A has only been insured for 80% of its rebuild value so the cost of the claim (£80,000 based on the maximum sum insured) is adjusted accordingly.
- Claim settlement is therefore £80,000 x 80% = £64,000 leaving a shortfall of £36,000.
One way to prevent this situation occurring is to arrange for your property to be professionally valued for rebuild purposes. Several building valuation companies can undertake these and increasingly they are becoming available on a desktop basis which negates the need for a full site visit. By arranging for such a valuation, not only will you guard against the cost of any shortfalls in the event of a loss, many insurance companies will agree to remove the condition of average providing you update your sums insured in line with the report. (Note – when choosing a valuer, it is prudent to check they are regulated by RICS (Royal Institution of Chartered Surveyors)).
As you can see, the potential cost of under-insuring can be huge – not only does it make good business sense to ensure your sums insured are correct, it can also mean more favourable terms from your insurer.
For more information on how we can help you ensure adequacy of your sums insured then please Contact us
*Taken from RebuildCostAssessment.com – Document V3B32019
Further reading: From the Association of British Insurers: https://www.abi.org.uk/products-and-issues/choosing-the-right-insurance/business-insurance/commercial-property-insurance/