Rather than basing coverage on the current market value of a property, a reinstatement cost assessment gives insurers accurate costings for the demolition, clearance and complete rebuild of a property.
This figure (known as the “declared value” or “sum insured” dependent on your policy wording) determines the level of cover needed, helping to avoid under and over-insurance. This is crucial for owners, Residents’ Management Companies (RMC’s) and leaseholders to help avoid unnecessary costs.
However, if an assessment is inaccurate or becomes outdated, the consequences can be significant. This article will explore the potential legal and financial implications that can arise if a property is damaged beyond repair.
What is a Reinstatement Cost Assessment?
A reinstatement cost assessment is a professional valuation of how much it would cost to rebuild a property from scratch. This includes things you may not immediately think of, such as site clearance, demolition and professional fees. Along with materials, labour and suitable housing for leaseholders in the interim, costs add up fast.
Insurers work on the basis of an accurate, up to date reinstatement cost assessment to make sure the buildings insurance policy is up to the task. If costs are overestimated, leaseholders can pay too much via their premiums, with no additional benefit. If costs are underestimated, the financial risks to the person responsible can be devastating.
Legal Consequences for Underinsurance
In most cases, underinsurance will result in severe out of pocket expenses for property owners. This can be financially devastating and have long-term consequences for individuals.
In cases of severe underinsurance, property owners could also face legal action. Firstly, from mortgage lenders- many mortgage agreements require adequate insurance cover as a condition. If the reinstatement cost assessment is incorrect and the insurance is insufficient, lenders may take legal steps to recover their losses.
Resident Management Company Directors can also face legal issues if they fail in their fiduciary duty to ensure adequate insurance for the property. Directors can be held personally liable for the shortfall in the insurance pay out as well as being taken to court for their negligence.
Property managers often oversee the insurance arrangements for the buildings they manage. If they fail to arrange for an up-to-date reinstatement cost assessment, or if they rely on outdated figures, they could face legal action from the property owners or RMC Directors. This can have a ripple effect, damaging their reputation and leading to loss of clients and a potential expensive professional indemnity insurance claim.
Insurance Against Costs
RMC Directors and Officers can take out a unique insurance to protect themselves against any inadvertent:
- Negligent acts, errors or omissions
- Misstatement or misleading statements
- Breach of duty
- Breach of authority
Our policy starts from just £95.00 and can give RMC volunteers the peace of mind they need to go about their work effectively and confidently. We also offer Legal Expense cover which offers protection including:
- Bodily injury
- Contract disputes
- Debt recovery
- Employment disputes and compensation awards
- Property protection
- Service occupancy
- Statutory licence protection
- Tax protection
Avoiding the Risks
To avoid legal and financial pitfalls, it’s essential to keep reinstatement cost assessments accurate and up-to-date. Best practice includes:
- Regular Reviews
Reinstatement cost assessments should be reviewed and updated regularly – ideally every three (or sooner, if there have been significant changes to the property or market conditions)
- Using Qualified Surveyors:
Only qualified RICS registered professionals should carry out these assessments. They have the expertise to consider all relevant factors, including building regulations, local construction costs, and any unique features of the property.
- Clear Communication
Property managers and RMC directors should communicate clearly with surveyors to ensure all relevant information is provided and considered in the assessment.
- Adequate Insurance Cover
Once the assessment is complete, the property’s insurance cover should be adjusted to reflect the updated reinstatement cost. Regular reviews of the insurance policy are also advisable to ensure it continues to meet the needs of the property.
