Underinsured buildings, how strong are your foundations?

  • By LiquidAdmin
  • 26 June, 2013
  • Comments Off on Underinsured buildings, how strong are your foundations?
80% of commercial properties assessed are found to be underinsured with the average level of  underinsurance being a massive 60%. For a £1m property that could mean a massive shortfall of £600,000. That same 60% is also  the average level of underinsurance found in residential properties as. Such shortcomings can be avoided. In this article we highlight not only the impact that underinsurance can have on unsuspecting business and home owners but also the frightening regularity with which it occurs.

For many “it will never happen to me” proves to be wishful thinking. The problems only grow when they discover that they are under insured and won’t have enough to rebuild or repair adequately. Discovering underinsurance is a common shock for those making property claims.


How big is the problem?

Most insurers can provide their own statistics on underinsurance found during claims settlement but analysis from Gleeds-Durden (Property, Constructions and Valuation consultants) shows that buildings sums insured are regularly out by between 12% and 75%. Properties insured for less than £500,000 face, on average, underinsurance of £200,000 whilst larger properties (£5m sum insured or more) can face seven figure shortfalls.  This can mean the difference between rebuilding a business or home and financial ruin.


How does this happen?

Whilst the main reason is usually that people have not checked their values over the years, additional factors can have an impact on the inaccuracy of building sums insured. Examples include:

– Basing the sum insured on the mortgage or sale/purchase value

– Buying a property and assuming that the previous owners had valued and insured it correctly.

– Changes in legislation that have had an impact on rebuild methods and costs such as fire safety, drainage and waste disposal, energy efficiency and disabled access

– Neglecting to take into account professional fees, debris removal and new foundations

– Underestimating the impact of the property being listed

– Failing to increase sums insured to take into account work done (i.e. extensions and renovations)

– Financial pressures that result in people seeking cheaper premiums at the cost of cover

In 2009 Aviva publicised the results of a survey that they carried out on 128 property owners that they insured. The alarming results showed that 86% of those properties surveyed were significantly underinsured, with the difference totalling £314m. 4 Years on, underinsurance remains a common problem.


How bad can it be?

Beware of the Average clause!

In the event of a catastrophe, such as a fire or floods, underinsurance can be the difference between rebuilding a home and being homeless. It can mean a business surviving or shutting down. But it can have an impact on small claims as well. Insurance policies that cover property have an ‘average’ clause which basically states that if you are under insured, any claim will be reduced by the level of underinsurance.

For example, you suffer £10,000 of damage due to a falling tree. You are insured for £100,000 but should be covered for £200,000. Insurers will reduce your £10,000 claim down to £5,000. When put in to this context, the small premium saving being made by keeping a low sum insured simply does not make financial sense.


But my insurance is ‘Index Linked’

Available on most buildings policies, Index Linking is the system where by insurers increase your sum insured every year in line with building and construction inflation. However, if your original value is wrong this simply means that the incorrect value is being increased, and it is still wrong. You also need to bear in mind that insurers often use an average rate across the UK; they won’t have taken into account unique elements of your building, work you may have undertaken during the year or the fact that you are based in a more expensive part of the country.


Guidance is on hand

As insurance advisers, we recognise the importance of making sure that insurance isn’t simply low cost but that it provides the protection needed. As well as asking the right questions, prompting you to think about the cover needed, we have teamed up with Gleeds-Durden to provide access to a valuation service for commercial properties.  Contact us now to find out more and to avoid being underinsured.

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