In recent years, the UK construction sector has experienced a perfect storm of inflationary pressures. From the aftermath of the COVID-19 pandemic and Brexit-related labour shortages to ongoing global supply chain issues, the cost of rebuilding a property has increased dramatically.
For Residents’ Management Companies (RMCs), Right to Manage (RTM) companies and freeholders responsible for insuring blocks of leasehold flats, this trend brings serious implications.
One of the most pressing risks is underinsurance. If your block’s reinstatement cost assessment (RCA) or insurance valuation has not been updated in the last few years, it may no longer reflect current rebuild costs – leaving your development exposed in the event of a claim.
In this article, we will explore how construction cost inflation impacts your insurance cover, why many buildings are now underinsured, and what you can do to protect your leaseholders and stay compliant.
Understanding Reinstatement Cost Assessments
A reinstatement cost assessment (RCA) estimates the cost of rebuilding a property following a total loss. This includes not just bricks and mortar, but also demolition, debris removal, professional fees, and regulatory compliance.
It is this figure (and not the property’s market value) that should form the basis of your building’s insurance policy. If the sum insured falls short of the actual reinstatement cost, any insurance claim may be reduced under the “average clause,” leaving leaseholders to cover the shortfall.
The Rising Cost of Rebuilding
Over the past few years, the cost of construction has soared. Several factors have contributed to this surge:
- The pandemic: Global lockdowns caused significant delays and shortages in materials and labour, pushing up prices.
- Brexit: New immigration rules reduced the availability of skilled tradespeople from the EU, exacerbating labour shortages.
- Supply chain disruption: Ongoing delays in the shipment of key materials like steel, timber, insulation, and electrical components have led to further cost increases.
- Energy costs and inflation: General inflation and rising energy prices have added pressure across the entire construction sector.
Together, these issues have caused the rebuild cost of buildings to climb sharply, sometimes by double-digit percentages in just a couple of years.
If your block’s insurance valuation has not been reviewed recently, it may no longer come close to covering the true reinstatement value.
Why Outdated Valuations Are a Risk
Many RMCs still rely on valuations that were conducted several years ago, or worse, on figures that have simply been carried forward at renewal. While this might keep things simple at budget time, it creates a significant exposure to underinsurance.
In the event of a fire, flood or structural collapse, the insurer may apply the average clause and reduce the payout proportionally to the level of underinsurance. That means if your building is insured for 75% of its true reinstatement cost, only 75% of any claim will be paid – even for partial losses.
This shortfall would then need to be covered by leaseholders via service charge demands or legal disputes, resulting in stress, financial strain, and potential reputational damage for RMC directors.
Your Legal Responsibility as an RMC or Freeholder
Most lease agreements include a requirement for the building to be insured for its full reinstatement value. This means that failing to maintain an up-to-date valuation could place the RMC, RTM company, or freeholder in breach of lease terms.
From a legal perspective, directors also have a fiduciary duty to act in the best interests of leaseholders. Ensuring accurate insurance cover is a key part of that duty. Failure to do so could lead to disputes, tribunal claims, or, in extreme cases, personal liability.
Staying Ahead: When to Review Your Valuation
To protect your block and fulfil your duty to leaseholders, it is essential to review your reinstatement cost valuation regularly. Best practice guidance recommends commissioning a full onsite RCA at least every 3 years. They should be carried out even more frequently during periods of high inflation and immediately following major building works such as re-roofing, extensions, refurbishments, or cladding replacement. Your RCA should also be repeated after any significant regulatory changes that could affect rebuild standards and costs
If you have relied on a desktop assessment in the past, now may be the time to invest in a full onsite inspection. Desktop RCAs can be useful for interim reviews but are less likely to capture the full detail and complexity of your building – particularly if modifications or non-standard construction are involved.
Practical Tips to Stay Protected
Do not delay. If your RCA is more than three years old or you have had recent building works, commission an updated valuation now. Appoint qualified, RICS-regulated surveyors who specialise in residential blocks and understand current construction trends.
Keeping good records is key. Retain copies of all valuations, insurance policies, and contractor reports in case of future queries or claims.
Finally, communicate with leaseholders. Let residents know when valuations are being conducted and explain why updates are in everyone’s best interest.
Final Thoughts
Construction cost inflation has created unknown issues for many leasehold developments. What was once adequate insurance cover may now fall dangerously short. For RMCs and freeholders, staying ahead of this trend is essential – not just to comply with the law, but to safeguard the financial wellbeing of all residents.
A professionally conducted, up-to-date reinstatement valuation gives you the confidence that your building is properly protected. It ensures that, should the worst happen, your insurance will respond as intended and with no nasty surprises.
