06

Underinsurance

The issue

A leading firm of property valuation experts recently found that 77% of the properties they valued were undervalued. The re-valuations that were carried out required an approximate uplift of between 50-55% in reinstatement costs*. 
Usually, the first time a property portfolio owner or manager is aware they have a problem is when they want to make a claim.

The consequences

At the very best property owners and managers end up in an unnecessary and lengthy negotiation with insurers to find a mutually acceptable conclusion to the claim. More often than not this will involve a reduction in the claims quantum, and in some cases, where underinsurance is found to be deliberate, total repudiation. 
Nearly all outcomes resulting from underinsurance have a financial impact on the owners that can reverberate beyond the actual claim in to other areas such as general financing and tenancy issues.

Valuations – some issues

Market value vs reinstatement costs 
This is one of the most common discrepancies in insurance valuations. In the relatively depressed market that prevails today, market values may be considerably less than rebuilding costs but there are others that can have an impact on market value Vs rebuilding costs over a period of time. For example, costs incurred during the original construction, such as decontamination clearance or earthworks, are unlikely to need repeating in rebuilding.

Tender Price Index - TPI 
The TPI is often used to add to base figures to accommodate annual inflation costs on properties. However, the index will not accurately reflect changes in building regulations or local market variations.

Building costs creep 
Particularly prevalent in recessionary times is the issue of low tendering by builders that creep upwards through the building process. It is the final cost that more accurately reflects the reinstatement costs.

Reinstatement improvements 
Property owners may want to rebuild with environmental improvements that were not in the original building or add additional features such as a sprinkler system. Strictly reinstatement will only provide for replacement of the original specification.

Our advice

The best way for property owners and managers to ensure valuations are accurately reflected in the sums insured in the policy is to introduce a system of regular re-valuations. Funds and Trusts have re-valuations on a regular basis but many companies do not have an automatic system in place.

Additional information

RICS are launching two publications in the autumn that can help property owners and managers with the subject of underinsurance. They are:

• Property manager’s guide to insurance
This guide is being written for property managers and surveyors who are involved with insurance cover required for commercial property owners.

• Reinstatement costs assessments of buildings
This guide is for surveyors and covers procedures for the assessment of rebuilding costs for non-domestic constructions.


If you would like us to inform you when they are published please e-mail us using this link: jason.o@pi-propertyinsurance.co.uk and we’ll let you know when they are available. 
*Survey of valuations carried out in 2008-2009 by Barrett Corp & Harrington

What to do next

We are experts in property insurance and understand all the issues surrounding accurate property valuations so if you’d like more information, or would like us to review your cover please call our experts now.

Call 01789 761660

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