Ensuring you have insurance cover for buildings is essential. However, it is not simply a case of being insured, you need to make sure the building is valued correctly. If you are under-insured, you would be leaving yourself exposed to potential costs in the event of a claim – or if you are over-insured you would be paying unnecessarily high premium payments.
This is where reinstatement cost assessments come in.
A reinstatement cost assessment is the basis adopted by the Royal Institution of Chartered Surveyors (RICS) for undertaking an appraisal of property, plant and machinery or contents for insurance purposes. The term reinstatement indicates to repair, reconstruct, or renew assets to a condition equal to but not better than when new.
In simple terms, it is the cost of needing to rebuild the whole property from scratch. It would help if you looked at a worst-case scenario of, say, a fire destroying property from an insurer’s perspective.
Therefore, a pay-out will need to cover the old debris being removed and the new property being built literally brick by brick, back to what it used to look like before the fire incident.
A reinstatement valuation is not the same as market value. The market value is what the property interest is worth to a new buyer looking to use or invest in it.
The reinstatement valuation looks at the actual rebuild cost which is often higher than the market value. It would usually cost more money to physically rebuild a property than it would be to sell it to someone else.
Once you have the reinstatement valuation in place, this is called the ‘Declared Value’ of the property. However, an actual higher ‘Sum Insured Cost’ is then used in the insurance policy as the final liability. This is usually between 15 – 50% higher than the Declared Value to include an ‘Inflation Provision.’ This is a final buffer to allow for any increased costs over the period of cover.
RICS recommends that full reassessment valuations are carried out every three years although updated assessments should be undertaken whenever there are significant changes to the buildings.
In the event that the building is under-insured, the insurance provider may invoke the Condition of Average Clause where the total claim is reduced proportionally to the value of under-insurance. This would mean that the policy holder would be liable for the shortfall in the pay out.
However if the cover is too high, you would be overpaying in your annual premium.
There may be a lease on your property whereby the landlord is covenanted to have sufficient insurance cover on the building. Failure to ensure the Sum Insured is correct would be a breach of the lease.
Property management company’s risk being taken to the first-tier tribunal for negligence if reinstatement valuations aren’t undertaken every 3 years.
These assessments should be through a qualified RICS building surveyor in tandem with the Building Cost Information Service through the Association of British Insurers.
It’s basically using standard online tools for construction costs and making an assessment of a particular property and set of circumstances.
However, there are other lessor alternatives to consider such as a desktop valuation, which is simpler and cheaper. Through insurance brokers, a calculation can be carried out based on standard figures without even inspecting the property for between £100 – £500.
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