Buildings insurance is going up like a rocket at the moment, and every block manager knows buildings have to be insured. Almost every lease will stipulate that it is the freeholder’s (landlord’s) responsibility to organise buildings insurance and reinstatement cost assessments for the benefit of the leaseholders, and the freeholder normally delegates those duties to its managing agent.
Clients, whether they are freeholders, RMCs or RTMs, naturally want lower running costs at times like these, and one area to cut back on is the cost of reinstatement cost assessments – hence rise in popularity of ‘desktop’ RCAs.
Do desktop RCAs actually save leaseholders money?
Desktop RCAs are cheaper to procure, as they can be produced entirely from behind a computer. Many in our industry fear that desktop assessments often yield higher rebuild costs (declared values) than RCAs generated following a physical on-site survey. Higher rebuild costs mean automatically higher premiums, often erasing the saving of a cheaper desktop assessment and costing the leaseholders far more than if there had been an on-site survey in the first place. Too high a declared value (DV) means over-insurance.
Why are desktop assessments more likely to lead to over-insurance?
Simply put, a desktop reinstatement cost assessor needs to make more assumptions about the property they are valuing for its rebuild cost, because, after all, they are not seeing the property in the flesh. We have seen evidence of ‘loading’ which means the calculated DV has been inflated to cover the assessor’s back – and their PI insurance! The assessor would rather the DV is higher than it needs to be, than lower, due to the risk of under-insurance.
Under-insurance is potentially catastrophic for the freeholder, leaseholders and managing agents because the insurer only pays out a claim in proportion to the DV the building is insured for, leaving the freeholder or leaseholders to pay the difference. And this could be for ANY claim, large or small. Clearly, the larger the claim, the more painful the consequences of under-insurance. So the desktop risk assessor may overestimate the DV to reduce the risk of under-insurance.
What does that over-insurance mean for the service charge payers?
Firstly, a desktop RCA on anything worth more than £1m is normally foolhardy. Consider that typical buildings insurance costs £200 per £100k of cover in a block management scenario. That’s 0.2% of the declared value. A desktop RCA could lead to a declared value that’s, say, 20% higher than one obtained by a physical inspection. Once you’re into the millions of pounds of cover, that 20% becomes very significant, far more significant than the upgrade price between a desktop RCA and a full physical inspection.
That means the same building insured for £1.2m (desktop) and £1.0m (physical) would have a premium of £2,400 (desktop) and £2,000 (physical). An RCA lasts three years before it ‘expires’ and the RICS recommend a ‘major review’ is carried out (read: re-survey), so over three years these figures would become £7,200 (desktop) and £6,000 (physical). See my summary below:
| Desktop RCA | RCA with physical inspection | |
| Surveyor’s RCA fee | £150 | £300 |
| Declared Value | £1.2m | £1.0m |
| Insurance Premium: say £200 per £100k of cover | £2,400 | £2,000 |
| Total cost to client in first year | £2,550 | £2,300 |
| Cost over 3 years (ignoring inflation) | £7,650 | £6,900 |
So in this case, £750 would be lost over a 3 year period by ordering a desktop RCA and that is for a property with a rebuild cost of (only) circa £1m.
Is there ever a time when a desktop RCA is worth it?
Well, I think so yes, and it all depends on two factors coming together at the same time: when a site is remote or otherwise expensive to get to site, and the site has a relatively low declared value in the first place.
Imagine a freeholder owns a two-unit property on the Isle of Wight. Let’s say it’s a high-street shop which insures for shell-and-core ‘CAT-A’ only with a flat above it. Even for a surveyor based on the south coast, it’s a full day out of the office. Unless you can find a firm that does RCAs regularly on the island, even a Portsmouth based firm are likely to charge you £700 for a physical assessment; those ferries aren’t cheap! Now imagine the current insurance value is only £400k. Perhaps it has been a bit under-insured and you’re expecting the new DV to be nearer £450k. A desktop survey could lead to a declared value of £540k, but a physical assessment would probably be nearer the £450k mark.
In order for the desktop inspection to represent better value to your client, the desktop fee is going to have to be £60 or less; any higher than that and it will be cheaper to send a surveyor over physically in order to visit the location, even if they charge £700! Do contact me for the maths behind the £60!
Are there other times when a desktop RCA may be valid?
Yes, and that’s when the same building has undergone a full elemental reinstatement cost assessment – say three years earlier – and the managing agent confirms that no material changes have been made to the building. In that case, if the same assessor is used, the assessor has all their numbers and notes from which to calculate a revised declared value from the comfort of their desk.
A desktop assessment is, usually, better than no assessment at all!
But for most of the time…
These are hard times, and desktop RCAs for £99 sound like a great bargain but in fact, most of the time even if the desktop RCA were free, you would be better off purchasing a full physical inspection, especially over the course of three years between RCA to avoid over-insurance and paying too high a premium.
Indeed, in the past year, EK Reinstatement Cost Assessments has found that even after three years of rampant inflation, we are sometimes able to bring declared values down on full physical RCA assessments, if the current declared value was based off a desktop RCA in 2019! Let that sink in for a moment…
There are times when desktop RCAs make sense, but normally these are for dealing with very low value buildings, in far-out or hard to reach places or if the same surveyor had previously carried out a full physical inspection last time around.
Bear this in mind too: most desktop RCA reports contain caveats that absolve the surveyor of these kinds of over-insurance mistakes on the basis that not visiting site puts the liability back onto the building owner (your client). Always check the desktop surveyor’s terms and conditions carefully before engaging!
If you’re ordering a desktop survey, you have to be absolutely certain you’re giving the surveyor everything they need in order to get the calculation correct. Where you are lacking floor plans, internal photos, or title deeds, you may want to send the surveyor to site after all.
James Paul MRICS
Director, EK Reinstatement Cost Assessments
For any questions on RCAs, contact James Paul MRICS at EK Reinstatement Cost Assessment Ltd at [email protected] or visit www.reinstatementcostassessment.com
