Underinsurance – The ticking time bomb for property owners

With as much as 80% of commercial properties not adequately insured, some of which are only covered for half the amount they should be* it’s a significant issue that, for many property owners, continues to fly under the radar.

After years of index-linked building insurance uplifts at about 2%, a combination of factors including Brexit, the Covid-19 pandemic, supply chain disruption, rising inflation and interest rates have contributed to a dramatic increase in the cost of building materials and labour. Index-linking rates are currently at about 10% but, even at that level, in many cases there is a gulf between the insurance sum insured and the actual property value at risk.

We commissioned research to better understand the size of the problem. A survey of almost 1,300 Aston Lark clients found that 80% were underinsured. Of these, the average underinsurance was 61% and the shortfall in value that should have been insured exceeded £300 million (an average of nearly £250,000 per property!).

If a property is underinsured, the insurer is likely to apply the condition of Average, whereby the amount of the claim is reduced proportionally to the amount of underinsurance.

So, if the sum insured is £1,000,000 but the value at risk should be £2,000,000 then, in the event of a £200,000 claim, the insurers may only pay £1m/£2m = 50% x £200,000 = £100,000 leaving a shortfall of £100,000. It’s also possible that the insurer may be entitled to void the policy altogether if it appears that the risk was misrepresented.

Avoid getting caught out

If it has been a while since you last reviewed your property insurance, here are a few questions to ask yourself to avoid getting caught out if you need to make a claim:

• Has a professional reinstatement assessment been carried out in the last 12 months?
• Does the building have extensive external features such as yards, car parks or gardens?
• Has the building recently been altered or extended?
• Has the property been built with new eco-friendly features, modern materials or designs?
• Have changing building regulations been accounted for?
• Is the location of the premises difficult to access (for example town centre location or terraced building.)
• Is the market value being used as the reinstatement value?
• Is the property listed?
• What is the age of the property? (older buildings often cost more to rebuild.)

And don’t underestimate these factors to reduce delays and minimise risk:

• Indemnity periods for Loss of Rent are typically not long enough to allow for delays in planning and construction.
• Index-linking or “Day One” inflation protection at 15% over 2 years generally isn’t enough.
• Check the allowance for professional fees, debris removal etc.

If taken too lightly, these factors can create a risk to your balance sheet as a property owner and may be a potential breach of lease requirements or lending covenants.

Getting the sum insured right will help to minimise delays if you need to rebuild, which should mitigate against the loss of income from tenants or potential reputational damage.

Don’t set and forget

Following a major loss, a lack of adequate cover in place can hinder a business’ recovery speed and possibly jeopardise its chance of survival.

Having comprehensive insurance will help you to get back to business as usual as quickly as possible.

And it’s important that throughout the lifetime of your policy you are continually assessing your sums insured and ensuring accurate levels of cover are in place.

How we can help

The latent issue of underinsurance in the property sector can accurately be described as a ticking time bomb but it’s an issue that is easily addressed with the right help and support.

Reassessing your sums insured and policy limits, through a professional valuation service is one of the best ways you can avoid underinsurance and make sure you’re one of the 20% who are adequately covered.

Some of these services will focus on buildings; others will also review assets.

Some insurers will waive the Average condition where a professional valuation has been obtained within the last three years. This means that, if the sums insured have been based on a professional valuation (and subsequently index-linked) then any claim payment will not be reduced. That could mean the difference between a business surviving or not!

Aston Lark offer two building insurance rebuilding valuation services to support clients with asset management, a desktop valuation for straightforward properties with a lower value and a site visit for significant or unusual properties. This is one of the best ways to ensure policyholders’ premises are valued correctly and their policy will respond as it should.

Here are two recent examples of the benefits of having an up-to-date valuation of your properties:

Education provider avoids £200,000 cost to rebuild

Aston Lark recently helped a commercial property client in the education sector to reassess the rebuild valuation of several of their premises. Shortly after, a fire destroyed one of the properties that had been revalued. The difference between the initial and revalued sum insured was £200,000 which the business would not have been covered for otherwise.

Residential property client identifies £22 million shortfall

Aston Lark recently assisted a residential property client to carry out a rebuild valuation on their portfolio of premises. It was quickly identified that there was a shortfall in the rebuild value for these properties of around £22 million, a deficit that would have jeopardised a claim under their insurance policy if the worst did happen.

If you would like to discuss your property insurance cover, please give me a call on 07970 084350 or email [email protected].

^{*Building Cost Information Service Survey by Royal Institution of Chartered Surveyors}