Authors: Nicholas Marshall & Jo Dalley
Jo Dalley and Nicholas Marshall from Reason Global Insurance offer information and advice on building’s insurance.
Suffering major damage to or losing a building in your business can have a devastating and potentially fatal effect. Flash floods, storms, high winds, and extreme heat are all part of the changing climate of the United Kingdom now. These perils, in addition to the more conventional losses for damage, fire and/or theft claims, are expanding the ever-increasing list of circumstances in which your property may be damaged.
Did you know that an estimated 80% of UK commercial property is underinsured? That’s a significant percentage, and it is causing concern across the insurance industry. Research evidence states that approximately 80% of businesses affected by a major incident ceased trading within a period of eighteen months. Often this can be attributed to buildings not being accurately surveyed to obtain an up-to-date rebuild value. This can mean inaccurate sums being declared to your insurer and the potential for under-insurance in the event of a claim.
If you own a storage property, office building or block it is highly advisable that a fully qualified independent surveyor provide you with an accurate rebuild cost. Building materials, including, but not limited to steel, bricks and cladding, have seen significant cost increases over the last two years, and that is not inclusive of ever-increasing labour costs.
If, like many others, you notify your brokers/insurers on a year-on-year basis that there have been no changes to your rebuild costs, the reality is that those costs could have significantly increased by as much as 45%.
Nelson Policies at Lloyds published information from the commercial property agent KWB regarding risks associated with underinsured commercial property. Using the aforementioned statistics, and in the event of a claim, if a property is underinsured then insurers will potentially only offer indemnity proportionately reduced. For example, a building is insured for £500,000 and the rebuild cost is £625,000, and the effect of 20% underinsurance on a £250,000 claim would see the insurer paying only £200,000, potentially leaving property owners with a shortfall of £50,000. Would the business want to be left to make up that shortfall trying to rebuild an affected property? Can the business afford to make up this shortfall?
Major incidents, as mentioned earlier, can cause irreversible property damage leaving business assets at risk, and it is crucial your property is accurately insured. Understandably, during the COVID-19 pandemic, many businesses were focused on staying afloat to continue their business activities and insurance, and rebuild values may not have been a priority. On the other hand, business owners may not have been tracking inflation in the value of the assets being insured.
The British Insurance Brokers Association (BIBA) has brought this to light stating, “The volume of claims being adjusted for underinsurance is rising dramatically”. Alongside the value(s) of buildings falling short, business interruption indemnity periods have not been sufficient. Policyholders will often take into account policy premium, sometimes looking at reducing an indemnity period which may be insufficient, but at a lower cost. However, with increased business disruptions and increases in the supply chain, the timescales involved in repairs and/or rebuilding properties has seen significant increases, meaning reducing indemnity periods is a false economy. Good brokers will always look to educate clients accordingly, which may see indemnity periods extended for a good reason.
BIBA printed a statement from Marsh & McLennan Cos Inc. stating that an indemnity period as low as twelve months raises red flags in many sectors of buildings insurance. It has been predicted that the (premium?) increases across casualty, motor and property in the United Kingdom alone will rise anywhere between 5% and 10% by the end of 2022.
All property owners should obtain accurate rebuild valuations, and costs involved in doing this can be quite reasonable. We want you, as property owners, to fully understand the financial implications of underinsurance and thus the importance of obtaining an up-to-date rebuild value(s). BIBA noted that insurers do not wish to adjust down payments for legitimate claims but ask that policyholders work with brokers and insurers to ensure their property is correctly and adequately covered.
At Reason Global Insurance we recommend that property should be professionally valued on a regular basis to ensure accurate sums insured. We do not wish to see any property owner suffer from underinsurance in the event of a claim.
As our climate continues to change and as building material costs and delays continue to increase, the risk of property damage increases, as do rebuild costs and timescales. Therefore, we strongly recommend that you immediately have a surveyor provide an up to date rebuild cost on your property and review your business interruption indemnity periods based on realistic rebuild timeframes.
First published in Removals & Storage Magazine 2022