Property Underinsurance – What is it and how can it affect you?
What is underinsurance?
Your insurance premium is calculated based on the amount of cover you choose to take out to protect your property. Underinsurance occurs when you’ve not taken out the right amount of insurance cover for your needs.
What does it mean if I am underinsured?
Taking out insufficient insurance cover will essentially mean any claim will be insufficiently covered.
Being underinsured does not mean you have intentionally chosen to declare a lower sum insured in return for a lower insurance premium; there is often confusion between the market value of a property and its rebuild cost. Likewise, you may have brought the business and its assets, maintaining the level of insurance the previous owner arranged.
- Your premises is insured for £500,000 but the accurate rebuild valuation of your premises is £1m
- You suffer a loss and the result is £70,000 damage
- The outcome would likely mean you will be responsible for £35,000 of the cost of the claim as you are 50% underinsured
To prevent this undesirable situation it is vital that you ensure that the sums insured are accurate and seek independent professional advice where appropriate.
How do I know if I’m underinsured?
Make sure you let your broker know about any changes to your business. Ask them to help you understand how you should assess whether your cover is sufﬁcient for your needs and what professional help may be available. Remember that some changes to your business might not just relate to contents or building insurance. If you have, for example, bought specialist equipment that takes time to replace, this will impact the amount of time it might take for you to get back on your feet after say, a ﬂood. Therefore this might impact the amount of business interruption insurance you need.
How can Morton Michel help?
Introducing RCA – the desktop rebuild valuation service!
To help in the battle against underinsurance we have engaged the Rebuild Cost Assessment service to provide an assessment on the reinstatement cost of your premises.
The service utilises publicly available information and uses Royal Institution of Chartered Surveyors (RICS) and Building Cost Information Service (BCIS) principles to deliver an assessment on the level of insurance you should consider when making your arrangements.
Benefits of RCA:
- It is an independent service and is fully funded by your insurer
- Valuations are Royal Institution of Chartered Surveyors certified
- Calculations include cost assessments for professional fees, labour, materials, planning and debris removal costs
- Calculations are based on the Building Cost Information Service recommended median cost per square metre for your business
- Reports include valuations based on including and excluding VAT
- An estimation on the time it will take to rebuild your premises is provided, helping you with business continuity planning
- Your insurer will remove the average condition from your buildings insurance policy
Frequently Asked Questions:
Understandably, when receiving your valuation you may have some questions regarding the report. We have listed some of the common frequently asked questions below.
We would always encourage you to contact us on 020 8603 0900 to discuss any queries further.
1. The images are out of date
The report provides images as guidance to demonstrate that it has been carried out on the correct premises – they are not an accurate reflection of all of the properties the RCA have calculated against.
2. I don’t need a valuation
Your building should be valued at least once every 2-3 years as the costs of rebuild do change. When was the last time you had your own valuation carried out?
3. I’ve had my own valuation
It is important to consider when your last valuation was carried out and whether the report provides a rebuild cost assessment for insurance purposes. Not all reports do and this is often the cause of in disparity between buildings sums insured.
4. What if I do not follow the RCA valuation?
You are at risk of being underinsured. It is advisable to commission your own independent report to RICS standard if you have not commissioned one for some time. Most underinsurance is identified at the point of a claim and we would not recommend waiting until this point.
5. The floor space is wrong
The RCA uses external wall measurements in place of internal measurements.
6. Do I insure including or excluding VAT?
You will need to consult with your accountant as to whether you are VAT registered or not.
7. How have they calculated the rate per metre squared?
The average rebuild cost per m2 is higher than most standard commercial building calculations. RCA understand the specialist nature of your business and use the Building Cost Information Service of the Royal Institution of Chartered Surveyors as a guide, along with other industry standard data. Remember, rebuild costs include reinstatement of features such as specialist flooring!
8. I don’t have a second building
This can be a result of the publicly available information not being entirely accurate. If this is the case for your report, we can provide the feedback to RCA and request your report is adjusted.
For further information about the RCA desktop rebuild valuation service please contact the Morton Michel team on 0330 058 9861 or email firstname.lastname@example.org.