The rising cost of construction: the impact on insurance

The impact of events like the Pandemic and Brexit, has caused both an increased demand for building materials and lengthy delays associated with the production of materials.

Insurance Age reported that 76% of UK properties¹ are suspected to be underinsured. This means that in the event of a claim, the policyholder may be required to fund some of the repairs themselves.  This may have less impact if the claim is small, but if it runs into tens of thousands of pounds, this may hit the policyholder hard.  So, it is important to set the correct sums insured.  

As an example, say the cost to rebuild a property is £500,000 but the sum insured is set at £250,000, or 50% of the value at risk. Any claim would be settled at half of its value, in this case, £250,000 if the property were to be completely destroyed, impacting the potential for the business to recover. This is known as the application of Average.

There can be several reasons why a building is left underinsured. It’s a common misconception that the market value of the property is a suitable level of cover. The market value is determined by many factors, but it is ultimately the amount that a buyer is willing to pay for it.  

What is needed is the cost to rebuild in the same manner, including debris removal, outbuildings, walls, fences, hardstanding, etc and making an allowance for professional fees that might be involved in any rebuild. The policy also covers any works required to comply with current Building Regulations. 

Failure to make allowance for extensions or significant refurbishments, additional costs associated with debris removal or difficult access, the inclusion (or otherwise) of VAT can all add to the problem.    
  

Expert advice should be obtained and the figures regularly reviewed. For qualifying customers, Ecclesiastical’s team of in-house Risk Management Surveyors and Appraisers can provide a valuation without any additional charge. Provided the policyholder follows our advice and lets us know about any changes to the premises, we can remove any underinsurance (Average) clause, leaving them free of any chance that a claim would be reduced. 

Once an accurate sum insured is set, it is important that this is reviewed and kept up to date, taking into consideration the (construction) market conditions and inflation. An insurance policy is usually index-linked or protected against inflation by a general uplift.  

In addition to the commonly available indices provided by the Building Cost Information Service (BCIS), Ecclesiastical has partnered with BCIS to build an exclusive index (the Ecclesiastical Heritage Index) to keep the sums insured for historic buildings up to date.  It should be noted that no index can be guaranteed to keep figures up to date indefinitely, so it is important to revisit the rebuild cost at least every five years.  

Underinsurance doesn’t just apply to buildings but also to contents, stock and business interruption insurances too.  Taking information from annual accounts will lead to incorrect figures, so it is important to be aware of how the sum insured should be calculated.