Rebuilding costs – what do they really mean?
Many insurance products for flats and apartments in the UK have evolved over the last twenty years, originally designed by insurers from commercial policies, says Residentsline’s Managing Director, Belinda Bagnall.
Insurance protection has been enhanced over the years but the risks faced by Residents’ Management Companies and their Property Managing Agents continue to increase due to environmental and government changes, more extreme weather conditions and a more litigious society. In the the first of two articles we aim to help you ensure that your insurance cover extends to the risks you and your RMC may face in 2012.
Why you should not rely on index linking to stay adequately insured
Following a recent survey, we found that the majority of RMCs rely on index linking to ensure their buildings’ sum insured remained adequate. Some RMCs that we questioned had not had an insurance valuation for over 10 years!
“Index linking is a monthly adjustment based on the latest percentage change usually from indices produced by the Building Cost Information Service (BCIS), a division of the Royal Institution of Chartered Surveyors”
Premiums are not altered during the period of insurance, but are recalculated for the following year by applying the “current” insurance rate to the adjusted sum insured. This appears suitable to safeguard your property until you look in to it a little deeper.
We approached four insurance companies who provided us with their index linking percentage for August 2011:
- Aviva 4%
- AXAUK 7%
- Zurich 4.5%
- RSA 4%
So why the variations?
According to the Insurers’ policy documents, the figures quoted are derived from the General House Building Index from the Building Cost Information Service , or “use of suitable or alternative indices” to cover inflation in rebuilding costs during the period of cover!
Joe Martin, Executive Director at BCIS, which has been the principal source of rebuilding cost information and house rebuilding cost inflation statistics in the UK for the last 30 years, says, “There is no single index that is completely right for updating the rebuilding cost of a block of flats – each of the indices available have their advantages and limitations”. The use of different indices by insurance companies could quickly lead to quite extreme discrepancies in accuracy of your buildings sum insured.
Joe comments, “This uncertainty could be overcome if, starting from a reliable reinstatement cost assessment, the sum insured is updated consistently from year to year. Even if the RMC were to choose a suitable index, indexation should not be relied on for more than a few years. The RICS Guidance Note ‘Reinstatement Cost Assessment and Insurance Claims’ states that, “Surveyors may wish to consider that the Reinstatement Cost Assessment is undertaken from first principles every three years or at lesser periods dependent on the circumstances”.
So what does your sum insured need to include? Apart from the obvious cost to rebuild your property to its current condition and repair, it also needs to cover:
Architects, surveyors and other professional fees – in the event of a complete loss, the services of architects, surveyors and other professionals will be required to ensure the property is redesigned and built to expected requirements and standards and complies with necessary legislation and regulations.
Planning permission – although your property is currently “in situ,” did you know that if a complete loss occurred, planning approval would need to be sought to comply with latest planning legislation?
Building Regulations – should your building burn to the ground, not only would you require it to be built to the same specification, as existing, but it would also have to conform to current local and national Building Regulations.
Greener Homes – does your current insurance valuation include the latest requirements to comply with “Greener Homes” in terms of energy conservation? This is about reducing CO² omissions and building energy performance in terms of solar gains, heating, ventilating, insulation and air tightness. After a complete loss you would be required to comply with current regulations.
Demolition and debris removal costs – these also need to be included in the sum insured and costs can be substantial following a large claim.
VAT – The sum insured on blocks of flats doesn’t need to include VAT. on its cost to rebuild (cost). However, it should allow for VAT. on the cost of demolition and fees. Did you know that if you suffered a major, but partial loss and insurers elected to repair rather than rebuild, that VAT would be applicable to the total repair cost? We would all agree that 20% is quite a chunk of your sum insured.
The cost of improvements, fixtures and fittings
One of Residentsline’s main concerns is the problem of overlooking the value of lessees’ improvements, fixtures and fittings. Most leases require the building sum insured to be equal to the full reinstatement cost and to include specific items such as kitchens, bathrooms, fitted furniture and the like contained within individual flats. The quality and cost of these fixtures may vary from flat to flat. With more flat owners choosing to improve rather than move, can you be sure that the value you have placed on your block is adequate, without viewing and valuing all your flat owners’ improvements?
Are you responsible for deciding the sum insured for your block when you may not have been inside many of the flats? Recently we were made aware of a claim for a flat owner who had suffered considerable fire damage in a block that was only 5 years old. Following investigation it turned out that the flat owner had £30,000 worth of home networking, wiring and cabling installed for his IT, Hi-Fi, speakers and digital equipment which the RMC was unaware of.
A recent survey showed in excess of 77% of all the building valuations handled by Barrett Corp and Harrington Ltd (BCH), involving billions of pounds worth of property, were underinsured. This outlines the danger of not having reinstatement costs assessed, with regular updates by a company that specialises in this area.
Remember that insurers leave the responsibility to provide a “correct and current” rebuilding cost with the policyholder.
For more information please call Belinda Bagnall on 0800 281235, or email [email protected].
For a block of flats insurance quotation for your property call the Residentsline team on 0800 281235 or visit Get a Quote – Residentsline Limited
