Fewer than one in ten commercial properties in the UK are adequately insured. In addition, underinsurance is a problem that is likely to get worse for property owners this year, thanks to inflation rates reaching a 30-year high in January 2022. Why? With construction and building material costs having risen sharply in the past year, the rebuild cost for your property is likely to be higher than expected (and probably higher than the amount it is insured for).
Nobody wants to pay too much for their building’s insurance. But if you are underinsured, you face a reduced pay-out in the event of a claim – potentially leaving you short by hundreds of thousands of pounds. So, especially when the cost of rebuilds is on the rise, we strongly advise property owners to have regular professional rebuild valuations to ensure that you remain adequately protected.
How does inflation affect insurance?
Rising inflation means increases in the cost of everything from consumer goods to construction. If your insurance policy is not reviewed regularly to reflect the most recent rebuild costs, it will likely mean that you are underinsured.
What if my property is underinsured?
Most insurance policies contain an “average clause”, which deals with undervalued properties. It means that in the event of a claim, they will take into account any undervaluing of the rebuild cost of your property and proportionately adjust any claims payment accordingly.
For example, if you have insured a building to the value of £100,000 but it actually costs £200,000 to rebuild the property, then as you are 50% under the actual rebuild value of the buildings, insurers would deduct 50% from any settlement. This applies to partial claims as well as a total loss. So in this example you would only receive a settlement of £50,000 in the event of a total loss, leaving you with a claims payment £50,000 below the sum insured and £150,000 lower than the rebuild cost!
What is inflation protection?
Inflation protection is a way to guard against the effects of inflation on your insurance policy pay-out. Most insurance policies contain a Day One inflation insurance clause, which gives you the ability to add protection should inflation rise during the period in which you are insured. This means that as long as the rebuild cost was accurate on the first day of your policy, you will be covered for the full cost, even if this has increased in the intervening time.
For example, if your insurance policy runs from 1st January and you insured your property for £100,000 on this date, you can claim for the full cost in December of that year. This applies even if, with inflation running at a hypothetical rate of 10%, the actual rebuild value has increased to £110,000.
It’s important to note that Day One clauses will not cover underinsurance, so it’s still vital that your insurance cover is an accurate reflection of your property’s value at the time it is taken out.
How to calculate your insurance rebuild cost
Your insurance rebuild cost is the amount that you would need to pay to rebuild your property if it was completely destroyed. The sum insured must be adequate to cover the structure including outside structures and extensions, fixtures and fittings, car parks and forecourts, as well as any walls, gates or fences. It must also be adequate to cater for professional fees such as architects and solicitors’ fees as well as the cost of debris removal. In short, the sum insured needs to be adequate to clear the site and start construction from the beginning as if it had never existed!
Getting your insurance rebuild value right is vital – it could cost you dearly if you get it wrong. We recommend a professional rebuild cost assessment, to ensure that your insurance policy reflects current costs and considers the rising rate of inflation.
Traditionally, obtaining a rebuild valuation has been an expensive exercise involving a visit to your property. However, at Hallsdale Commercial we offer our clients an exclusive desktop valuation service, a cost-effective way to get an accurate valuation, without the expense of a visit and survey.
Starting at just £150 + VAT, you will receive a full rebuild report which will guarantee that your property can be insured for the correct figure.