In this blog post we will discuss why a Buildings Reinstatement Cost for Insurance is critical to getting a claim fully paid when disaster hits.
Firstly, ask yourself – Do you think Insurers try and wriggle out of claims, knock you down on your claim value and use small print to their advantage? Many customers get this impression because of mis-understandings they make over the information that needs to be provided to Insurers before you buy a policy. However, despite the negative feelings towards insurers generated by some customer’s well publicised bad experiences, insurance remains the single most reliable and efficient way to protect your investment in property. So buying insurance is sensible, but ensuring that when the worst happens you get your deserved claim settlement is the ultimate goal.
When it comes to insuring Buildings, the Reinstatement Cost for a building is used as the entire basis for buildings insurance, so it is important to understand how this is defined and how to get an accurate valuation. Getting the wrong valuation can mean you either over-insure which leads to paying premiums that are too high, or in the worst case under-insure meaning the Insurers can avoid paying enough under your claim to rebuild.
What is a Buildings Reinstatement Cost and why is it used for Buildings Insurance?
Firstly let’s get away from thinking of Market Value. What you pay for a property is what it is worth in the market. A property comprises value of land and the buildings upon it as well as associated future financial income, accessibility of local attractions and amenities. Values can vary greatly between different areas of the country and types of location, although the building on the property might be identical.
Buildings Reinstatement cost is the cost to rebuild only, it does not need to consider the value of any land, local attractions or amenities.
Insurers, therefore, use the Reinstatement Cost basis for Buildings Insurance. This complies with the general insurance principal of indemnity – putting the Insured into the equivalent financial position as before their loss. Market Value insurance would be problematic because market value fluctuates – it may reduce or increase without damage being caused to buildings, Insurers could not assess and underwrite market fluctuations.
What is Declared Value and what does Declared Value mean?
Much to the confusion of Insurance Customers, Declared Value is used in many Insurance Policies to identify the Reinstatement Cost. Despite the use of the word ‘value’ this still has no relationship to market value of your property.
This term arises from the custom of Insurers asking their customers to ‘declare’ a reinstatement cost valuation that will form the basis of the Buildings Insurance Policy.
A Declared Value is also often association with insurance cover on a ‘Day One Basis’ – which means the Declared Value you provide to Insurers is the Building Reinstatement Cost that would apply if the building was destroyed on the first day of the insurance policy. Insurers then generally allow a Sum Insured at least 15% higher than the Declared Value to allow for rebuilding costs inflation during the period of insurance,
The importance of getting your Building Reinstatement Cost right
The biggest single impact of using the wrong Declared Value for Insurance purposes is the application of Average by Insurers on a claim. This standard commercial insurance provision says that if you underinsure your property, say by inadvertently declaring a Reinstatement Cost Value 25% lower than it ought to be, Insurers can consider you as a joint insurer and reduce any claim payment by an automatic 25% – potentially leaving you substantially out of pocket when it comes to reinstating the building damaged.
Over-insurance on the other hand can lead to payment of higher premiums than you need, which over the years can again leave you well out of pocket.
What can you do as a Property owner to get the Building Reinstatement Cost right?
When you buy a new premises, ensure you have a buyer’s survey undertaken which includes an ‘insurance valuation’ or ‘valuation for insurance purposes’. These are the terms commonly used by Surveyors for the Reinstatement Cost Value of the buildings.
At least every five years you should obtain a current Reinstatement Cost Valuation from the same surveyor or another suitably qualified surveyor, for example a RICS member. This will allow you to keep the declared value give to Insurers as up to date as possible.
Always ask your broker to insured on a ‘Day One Basis’ to allow for inflationary increases in building costs during the policy period (and rebuild periods, remember if you have a total loss on the final day of the policy the rebuild could take twelve or more months to complete, so you are protecting the impact of inflation across potentially two or more years.)
About Butler Evans
Butler Evans are Risk Consultants and Insurance Brokers. We work with our customers to gain a thorough understanding of their business so we can ensure Insurance Policies are correctly purchased to provide the right cover if there is a claim.
If you would like any further information on this subject or a related risk & insurance problem, please do contact us at email@example.com or on 0845 431 0448