While a structural warranty is not a legal requirement, it’s safe to say no SME/ experienced property developer wants to be without cover and face the risk of an uninsured loss. So if you would never leave a property uninsured, why would you leave your property Underinsured?
The Insurance Times recently reported that where businesses had undertaken reinstatement valuations for buildings or worked out what it would cost them to rebuild a property from scratch, more than 90% of these buildings were originally underinsured by more than 10%. The average amount of underinsurance was 41%.
Rebuild cost Vs. the Sum Insurance Vs. Levels of indemnity
Underwriters calculate premiums based on the sum insured, i.e. the maximum limit payable under the policy. It is the policyholders’ responsibility to provide the correct value. If a policyholder has to make a claim, the insurer will check the sum insured to determine whether an appropriate premium has been collected. Therefore, in the event of a claim, you would receive a reduced insurance payout that could be negatively impacted.
The temptation for the insured is to ‘manage’ the cost of their premiums by not factoring in the increased costs they’ve had to bear. While this can provide short-term relief in respect of the cost of the insurance, this creates a dangerous false economy, which reveals itself too late when there is a problem.
One way of mitigating this risk is by picking the right structural warranty insurance advisor. Having a specialist procuring and representing your insurance interests in a hardening market is a vital consideration. Business leaders need insurance advisors focused on protecting their business and projects – This sometimes means having tough conversations with clients about the cost of a policy and why it’s important to:
- Maintain the appropriate level of cover
- Factor in the continuing rise in inflation that we’re seeing.
Even on smaller projects, developers should always confirm in writing that the reinstatement cost and the limit of indemnity on the policy are complementary to one another.
It’s alarming how often we see an “alternative quote” that is priced attractively but often leaves the developer grossly underinsured. Rory Mcllroy recently said that decisions based purely on money don’t usually go the right way and that observation rings loudly and true when it comes to insurance.
Should policyholders reduce sums insured to lower premiums?
If a policyholder wishes to reduce their insurance premium, they often look at the sum insured without adequately considering the rebuild cost of their property or any other consequences.
As an FCA-regulated advisory, we must ensure property developers partner with an insurer that works on a full construction value basis.
3 Tips for preventing underinsurance
- Re-build: Your overall sum insured is the most you would need to rebuild and replace from absolute scratch. Consider a professional valuation by a RICS qualified valuer.
- Limits: Are the policy limits insufficient and what provisions do they make for the rising cost of inflation over the term of the policy?
- Values: Update the replacement values of plant, assets, and premises annually.
Securing structural warranty insurance
To avoid becoming part of the alarming statistics in the beginning of this piece, property professionals should seek guidance from experienced and independent advisors.
Developers of mid to large schemes should ensure that the development’s sum-insured is professionally reviewed to adequately reflect any alterations, improvements, or replacements during the year.
When your next project does come into focus, we would be happy to talk through the scheme, review any potential gaps in cover, and offer our pragmatic and unconflicted advice on the right structural warranty insurance policy for you.