After many years of low inflation and interest rates, the construction industry has been hit hard by a perfect storm of events, including Brexit, the pandemic, and the war in Ukraine, leading to a surge in inflation and materials costs reaching their highest levels in 40 years (Royal Institute of Chartered Surveyors).
Reason Global account manager, Roger Midgley, highlights the importance of ensuring that your buildings insurance policy keeps pace with inflation to avoid the risk of underinsurance.
The pre-existing challenges of a lack of skilled workers were exacerbated by Brexit, as new restrictions regarding the end of EU freedom of movement meant a significant reduction in migrant construction workers. According to the Construction Industry Training Board (CITB), the industry needs an additional 266,000 workers between now and 2026 to meet demand.
Steel supply shortages have also led to higher prices and inflation, with prices extremely volatile since the beginning of the pandemic. The war has exacerbated these trends. As a result, leading contractors have said inflation for projects with greater exposure to the steel market is likely to reach double figures on some construction projects this year.
How to ensure that your Buildings insurance cover keeps up to pace with inflation
It is estimated that 80% of all commercial properties are underinsured by a significant amount. It is, therefore, vital to ensure that you regularly review the adequacy of the reinstatement costs of your buildings.
Underinsurance is called the ‘Condition of Average’ in most policy wordings. This can arise in the event of a claim where it becomes apparent that the property has not been insured for the actual reinstatement cost.
In this scenario, your insurer can choose to reduce their liability by the amount of under insurance proportionately. For instance, if a property is insured for £750,000, but the actual cost of reinstatement is £1 Million, only 75% of the true sum has been insured. Following a fire, the building sustained a loss of £500,000, in which case the insurer’s liability would be 75%, so their settlement would be £375,000, providing a shortfall of £125,000.
To protect against the rising costs of inflation building insurance policies provide an Index Linking provision whereby the sums insured are automatically increased by insurers at renewal in line with BCIS (Building Cost Information Service) Index. The BCIS take into account inflationary factors in their calculations, including the cost of labour, materials and professional fees, that may affect the cost of rebuilding a property.
Index linking is based upon the declared value provided, so this sum must be adequate in the first instance. However, relying purely on index linking alone is not recommended because the index used represents an average, so it may not reflect increases required on all Buildings. This can vary depending on the nature of construction materials and/or specialist labour requirements and/or location, such as remote or city centre areas.
“It’s essential that the correct sums are insured at the start of the policy, so if there was a loss incurred during the year such as a fire or flood. If the correct sums were not insured then the insurer could apply average.”
Roger Midgley – Account Executive
We recommend that a professional valuation is carried out every three years to ensure that the buildings sum insured is sufficient. This should be carried out by a RICS-approved Surveyor.
We can offer a facility for a professional valuation service at preferential rates. Various options are available, from a desktop valuation to a full site survey, depending on the complexity of the premises, with costs starting from as little as £210 plus VAT for a desktop offering. If this is of interest, please get in touch with us.
