Rising building costs bring underinsurance risk

For investors and property owners – buildings insurance should act as an important safeguard protecting property assets against unexpected events.

Having such in place should cover the costs of repairs or rebuilding work after an insured event like a flood or fire but, the reality for all too many property owners across both domestic and commercial property can be very different.

In fact, recent research has found that 80% of UK properties are underinsured – to put that into context, that’s around 587,000 high net worth homes and commercial property with a total value of £340 billion standing without adequate buildings insurance

Detrimental outcomes

This insurance gap is certainly not one an investor or property owner can ignore as it can have a considerable financial impact should the time arise to make a claim. On average, underinsured buildings are covered for just 68% of the amount they should be.  In practice that could lead to two potentially disastrous outcomes in the event of a claim.

Firstly, the insurer could apply a ‘Condition of Average’ clause in many building insurance contracts that allows insurers to reduce claims on underinsured properties by the corresponding percentage.  Take this example, a property owner claiming £100,000 to cover repair or rebuild work after an insured incident could only receive £68,000 in settlement if only 68% of the property value is covered by insurance.

Secondly, and most probably even worse, in significant cases of underinsurance, the insurer could even say that the policy is void as the client failed in their duty of fair presentation under the Insurance Act – and take note, it is the responsibility of the property owner to ensure that valuations provided and presented for insurance purposes are accurate.

What are the causes of this worrying trend?

Inaccurate property valuations

There is a common misunderstanding that a property’s market value and its insurance value are interchangeable.  In fact, an insurance valuation refers to the cost of rebuilding a property, which would include a range of costs not covered by market valuation.

These include labour and materials, but also the cost of site access and the rebuild value of areas surrounding the property, such as trees, outbuildings, and car park areas.  The property value for insurance purposes must be the same definition of buildings set out in the policy.

Rising construction costs

To add insult to injury, even buildings that were accurately valued when a policy was originally taken out may now be edging over into underinsurance, because of huge rises in the cost of labour and building materials. Inevitably the situation is precarious for those that are currently underinsured due to an inaccurate valuation.

FACT:  Restrained construction demand built up during the pandemic lockdowns, further compounded by the Brexit effect on EU imports and of course, the demise of around 1.5 million foreign works since the beginning of 2020 have driven construction prices up as much as 15% in 2021.

Simultaneously, price rises for specific building materials have been even higher ie: Timber prices have risen by 20-50% and increased demand for construction materials overseas has extended lead times for virtually all materials – which could again at costs to building work projects.

Day one uplifts and indexing – trailing behind

Property owners are not necessarily protected against the rise in cost by inflation indexing for residential property and day-one uplift clauses in commercial building insurance. However, the impact of material cost increases far outweighs baseline inflation and the retail price index, this may be a false sense of security – because an inflation-linked uplift in cover will almost certainly fall short of the actual increase driven by labour and material costs.

What to do next?

At Riskworks, we want to give you the peace of mind that your building is insured for an adequate amount so that underinsurance is not something you need to worry about.

We work with Rebuild Cost Assessment which can provide an RICS Approved accurate insurance valuation, without the requirement of an on-site survey.

To find out more about this brilliant service, please do not hesitate to call our office on 01625 547754