Property insurance valuations and the underinsurance issue

In the majority of commercial or non-standard property insurance policies, the declared value (building sum insured or rebuild value) is critical to set the correct level of insurance cover.

An incorrect declared value could result in over-insurance – over payment of premium by the insured or worse still, underinsurance – resulting in a major financial loss to the insured in the event of a valid claim.

Underinsurance will only become apparent at the time when the policy is required to react, having a detrimental effect on the property owner and insurer partners.

How much of an issue is underinsurance?

According to our data, which includes over 55,000 property assessments, 80% of properties (non-standard, commercial or flats) are underinsured by up to 55%, on average.

To put this into context, if a UK property had £200,000 worth of damage on a building which is insured for £825,000, but should in fact be insured for £1,500,000, the insurers may only be liable for 55% of the £200,000 damage.

Therefore, the property owner would only be entitled to £110,000. This is despite the fact, that they are well within the £825,000 sum insured.

How could underinsurance affect a property owner?

Not having the right insurance coverage could be devastating for property owners to recover from financially.

If the property is used for commercial activities or for residential lettings, the financial impact could affect livelihoods too – putting business owners into bankruptcy.

Setting the rebuild value

Responsibility falls with the property owner or freeholding entity to ensure that the rebuild value of the property on the insurance policy is correct.

For non-standard, commercial buildings or blocks of flats, this is not a straightforward task – requiring specialist surveying knowledge and expertise.

Yet often, the rebuild value is estimated, or average price data such as the BCIS calculator, is used. It’s difficult to define what ‘average’ is when there are so many variables from one property to another and even more so with older properties, small holdings, blocks of flats and commercial buildings – ‘average’ is not reliable enough.

What happens when there’s a claim?

When a claim is made, a Loss Adjuster will assess whether the property was accurately insured.

If it is underinsured, depending on the policy wording, there may be a ‘Condition of Average Clause’ whereby the amount of claim is reduced proportionally to the value of underinsurance.

It is also possible that the insurer may be entitled to avoid i.e. not pay the claim, if it materialises that the risk was unfairly presented.

How to prevent underinsurance

The simplest way to prevent underinsurance is to instruct a RICS compliant Reinstatement Cost Assessment (RCA) from a reputable company.

An RCA is a site-based buildings assessment carried out by an experienced Buildings Insurance Surveyor.

The RCA can be tailored to a specific insurance policy and takes into consideration every aspect of a property from the boundaries and driveway to the fixtures and fittings.

When should a Reinstatement Cost Assessment be carried out?

If any of the below criteria are met, we would recommend an RCA is carried out:

1. Building is of protected status
2. Building(s) are made of stone
3. Property is difficult to reach
4. Building is eco-friendly
5. Property was constructed before WWII
6. Building has been recently altered
7. Use of the building(s) has changed
8. It’s more than 10 years since the building had a professional building insurance valuation
9. Extensive external features such as outbuildings
10. Updated with expensive fixtures and fittings

How to instruct an RCA

BCH are the chosen provider of RCAs to policyholders of major insurers and brokerages.

You can call us on 0044 1455 293 510, email info@bch-ltd.ie or contact us here to arrange an RCA for a property.

If you are a broker, insurer or managing agent, you may benefit from our Portal which through a log-in, enables you to request, manage and track the status of multiple RCAs for your customers – ask us for more information!