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Are you getting your real estate sums right?

Published: 30/09/13

There are multiple variables that need to be considered to ensure that the sums insured on a building are adequate, but as one of our insurers is keen to point out – this doesn’t include complacency.

The amount of money it will cost to rebuild, or reinstate a property depends on such factors as its construction, style, quality, condition and location, as well as important considerations such as building regulations and the cost of labour.

However, following the correction in real estate prices caused by the financial crisis and the sluggish nature of the economy since then, complacency is a growing problem that we all need to careful about.

“People are fairly relaxed about valuations at the moment because rebuilding index values over the last few years have gone up in relatively fairly small steps,” said Jonathan Scotcher, Underwriting Manager for Real Estate at Zurich.

“But this is a danger as even though index-linking is hovering between 1%-3% in both the residential and commercial sectors, we have actually seen a few quite wide differences in valuations.

“….clients can’t be complacent because of the changes to building regulations and all sorts of other geographical factors that simmer underneath the surface.

“The general index-linking figures tend to mask an awful lot of other movements. For instance, there are absolutely differences in rebuilding costs between the north and the south.”

Special care with unusual buildings
And it is the more unusual buildings – such as listed or other landmark buildings – that expert advice should be a prerequisite when working out the sums insured.

“Where you have a listed building or a landmark building that is outside the norm and takes specialist construction, it is crucial that valuers are experienced in putting reinstatement values to premises of that nature,” said Colin Prince, Deputy Underwriter Manager for Real Estate at Zurich.

“You need to make sure that it is done on site and not using a generic valuation because by their very nature these things need to be treated individually by assessed by someone who understands it. The cost of rebuilding these types of buildings could be several times as much per square foot as a standard property.”

Focus on building regulations
It is, however, new UK building regulations and the introduction of more rigorous environmental laws that are causing total rebuild costs to skyrocket the most.

This is because if there was a total loss, a property valuation needs to be on the basis that a property is reinstated ‘as built’ but with additional allowances for improvements that will be required by building regulations in force at the time of a reinstatement and not at the time of construction, which may end up being a substantial sum insured.

“These stringent codes of practice are increasing the cost of a total rebuild and the vast majority relate to energy performance or, put another way, insulation,” said Colin.

Dangers of underinsurance
We have talked before about the dangers of underinsurance, but it’s so important that we’re going to do it again!

If you insure a building for less than its full reinstatement cost you are putting yourself in danger of being exposed in the event of substantial damage and may only achieve a percentage of the actual cost to repair the damage. Landlords are either unaware, or are intentionally running these risks.

Last year, the Building Cost Information Service, which is part of the Royal Institution of Chartered Surveyors, estimated that 80% of commercial properties could be underinsured.

For landlords who regularly do professional revaluations and still find themselves underinsured, Zurich has added a waiver of underinsurance rights. Naturally, this will only apply to those who have demonstrably behaved in a responsible manner.  Landlords who choose to ignore or don’t understand reinstatement values could find themselves out of pocket in the event of a claim. If this is something that you are worried about talk to your Flint broker, they will be happy to give you advice.

If you need to speak to someone about commercial property insurance, call Dawn Charlesworth on 0845 371 1452 or email dawncharlesworth@flintinsurance.co.uk


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