Are Desktop RCAs Worth the Paper They’re Printed On?

When you hear the terms ‘reinstatement cost assessment’ or ‘insurance valuation’, those who understand the importance of organising one will be doing their very best to avoid underinsurance. And underinsurance is still very much a problem that we see on a daily basis. What about overinsurance?

Last year, the worst case was a building insured for around 20% of what it should have been – and it would be difficult to blame that on unbridled inflation or even excluding VAT from the calculations.

Relatively little is discussed amongst managing agents, RMCs, RTMs, freeholders, insurance brokers and RCA practitioners about overinsurance and its implications for leaseholders’ hard earned service charges. It’s more widespread that you might have been led to believe.

Overinsurance arises due to several factors, for instance, an unnecessarily high rebuild cost (otherwise known as the declared value or DV) may have been index linked by the insurer or broker year after year, further puffing up the DV and therefore the insurance premium that the leaseholders are paying.

In many cases, a fear of underinsuring a building (and a potential professional indemnity claim) encourages the reinstatement cost assessor to add some ‘fat’ to their calculations.

This over-vigilance borders on negligence. A surveyor accepting an instruction to conduct an RCA ought to be suitably capable of providing the service without building in bogus contingencies.

At the more innocent end of the spectrum, overinsurance is often the result of the exponential take-up of ‘desktop’ RCAs. Understandably popular during the coronavirus lockdowns, a desk assessment precludes the need to visit site, thus the DV is determined from behind a computer.

Such remote assessments predictably lead to higher declared values than those determined by a physical inspection, as assumptions lead to contingencies which lead to unnecessarily high numbers.

Earlier this year, I undertook an RCA on a well-known listed building in a major British city centre and concluded that it was insured for twice what it would have costed to rebuild. I doubted myself at first, convinced I had missed something. A grade II listed building, prominent, well managed…surely it would not be unnecessarily insured for double the DV.

Yet it was.

Understandably, the client wanted answers and I speculated that a large, multi-storey atrium in the building had been included as a continuous floorplate by, I deduced, an assessor who had carried out the RCA remotely and was therefore unaware of the atrium.

A remote assessment, possibly conducted without floor plans or photographs and relying on low-res Google Earth images, contributed to a blunder with serious consequences. Then in magnifying the error, index-linking of the DV only served to inflate insurance premium year after year.

In most cases, any sort of RCA is better than guesswork and we have seen several cases where property managers have only been able to convince their clients to spend £100 on a desktop assessment. We would like to think that a 5 minute read of this article would equip property managers with enough ammunition to guide their clients away from such a trap.

The concern is that block managers across the sector are promoting desktop assessments to be in equal standing to a physical inspection. Simply, they are not.

Typically, we find that desktop RCAs yield a DV that is about 20% higher than it needs to be.

For example, a building with a declared value of £25m rated at say 0.15% yields a buildings insurance premium of £37,500. Add in insurance premium tax (IPT) at 12% and your total buildings insurance premium is £42,000.

If the same building underwent a desktop assessment that generated a DV that was 20% higher at £30m, the premium becomes a fraction over £50,000, and about £8,000 of the leaseholders’ service charge monies have been squandered – all to save a few hundred pounds when commissioning the RCA.

Add in terrorism cover and in central London and other higher risk arears, and that’s a total of £10,200 of the leaseholders’ money flushed away.

Would you expect a leaseholder or RMC director to discover this and stay quiet? Probably not. Could they claim they have been mis-sold a desktop RCA? If the status quo continued for say three years until the next RCA was commissioned that £10k becomes £30k of potential damages and a sum worth instructing solicitors over.

RMCs and RTMs need guidance, and having read this article, you may now think twice about instructing a desktop assessment without explaining to your client the potential consequences of overinsurance.

At a time when an increasing number of leaseholders are struggling to find the funds to extend their leases or collectively enfranchise, guiding your clients away from penny-wise but pound-foolish decisions ought to earn you accolades.

‘Lean but accurate’ is mantra we live by at EK Reinstatement Cost Assessments, by minimising any unnecessary largesse which keeps DVs as tight as reasonably possible without landing in underinsurance territory.

For more information, visit www.reinstatementcostassessment.com