One piece of information brokers need to know before quoting or renewing a policy is the Buildings Declared Value of the building. That is the sum on which your cover is based and even though it is an estimate of the cost of rebuilding in the unlikely event of a total loss, getting it wrong can affect even the smallest claim.
Under-declaring is usually unintentional, because people don’t realise the importance of keeping their valuation up to date. If it is intentional, with a view to reducing premiums, it is a false economy: the savings are likely to be infinitesimal compared to the costs of not being fully covered if you need to make a claim.
At Gallagher, we always highlight the need for an up to date valuation of our customer’s buildings, and we even offer a streamlined route to getting updated for owners and managers of blocks of flats at appropriate rates.
Underinsurance is a big issue
Recent Gallagher research found 43% of commercial property owners who repaired or rebuilt their property assets in 2022 were underinsured. Our claims managers responsible for commercial property repairs estimate that businesses that have not reviewed their insurance could be liable for over 40% of the value of repairs or rebuilds on average due to underinsurance. Remember, blocks of flats are counted as commercial property for insurance purposes.
The most common reasons amongst business owners for not reviewing and correcting their property valuation was thinking nothing had changed since last time they checked (29%), trying to keep insurance costs down while inflation is causing budget constraints elsewhere (23%) and simply being too busy with other priorities (20%) to think about it.
Valuation specialists Rebuild Cost Assessment has estimated the underinsurance total for all UK commercial properties is at £375 billion. This data derived from 26,861 Rebuild Cost Assessments completed between September 2021 and August 2022.
They have also reported 83% of UK properties are underinsured, on average being covered for just 66% of the amount they should be. Conversely, 13% are over-insured and overpaying for cover on based on an average of 132% of the correct Buildings Declared Value.
For smaller blocks of flats, the underinsurance gap is biggest among buildings insured for up to £500,000, which, according to this report from Rebuild Cost Assessment, are on average only covered for 51% of their rebuild cost. Buildings insured for more than £2 million are closer to what they should be, but still only covered on average for 70% of the correct rebuild cost. To add context, the average value of a block of flats insured by our UK specialist Blocks of Flats Insurance team in 2022 was just over £1.5 million.
Understanding the numbers
A buildings insurance policy schedule will often show two values: a Declared Value and a Sum Insured. These determine how the insurer handles inflation during the insured period.
Buildings Declared Value (BDV) is the amount you are covered for to rebuild your property after a total loss on the day the policy cover starts. The BDV can often appear to be relatively low when seen in the context of the market value of a block of flats. However, it is very significant because insurers use it as a benchmark for all claims: if it is wrong, then all claims will be adjusted accordingly, be it for water damage or breakages. Imagine having to explain that to the service charge payers.
The Sum Insured, a higher number, provides for inflation (called a Day One Uplift) and is undoubtedly especially important in the current economic climate. The Sum Insured is based on what insurers think is sufficient to rebuild your property including any increase in the cost of materials, labour etc., during the year due to inflationary factors. So, even if you suffer a loss on the very last day of the policy, you still have the assurance of having cover in place.
Nevertheless, it all starts with getting the BDV right; you might not want to rely on automatic indexing to keep your block’s BDV up to date. Indexing is based on averages, taking no account of, for example, variations in building styles and materials or regional differences. It is, of course, of little use if you have the wrong starting point in the first place.
It can be beneficial to get your property revalued every three to five years. These days, revaluation can often be done by desktop research, avoiding potentially costly site visits by surveyors. Just make sure the valuers you choose are professionals you can trust, and regulated by the Royal Institution of Chartered Surveyors.
Your insurer must tell you the BDV that they are basing the premium on, and a good broker will check with you how old it is, and help you to update it if necessary. Nevertheless, there is no escaping that it is ultimately your responsibility to get it right.
Rebuild cost evaluations from Gallagher
If you are concerned that your building may not be insured for a suitable amount, you can request a copy of our building insurance valuations fact sheet by emailing UKinfo@ajg.com. Alternatively, you can request a call back or, if you would like to discuss a valuation with one of our colleagues, call 0800 138 7555.
To find out more about Gallagher Blocks of Flats Insurance visit ajg.com/uk/block.