The impact of rising building costs on insurance

Rising rebuild costs mean some organisations could discover too late that their insurance cover is no longer sufficient.

Global events, including the conflict in the Middle East and the war in Ukraine, are having a significant impact on construction costs. The Strait of Hormuz in particular is impacting the cost of energy as it handles a substantial amount of the World's oil. The knock-on impact is:

• Increased manufacturing costs for energy-intensive products

• Increased costs for imported goods

• Longer delivery routes causing delays.

As an island nation that relies heavily on imports, the UK is more vulnerable to the impacts. As a result, inflation may remain higher for longer in the UK, particularly if the conflict continues¹.

Couple this with labour availability, caused by skills shortages an aging workforce, wage pressures, and BCIS has forecast that building costs will increase by 13.1% over the next five years ².

According to industry data, 71% of commercial properties and 68% of residential properties in the UK are underinsured³. This has always been an issue and properties can be underinsured for a number of reasons, but the problem is exacerbated by rising costs.

Insurance won’t cover the full cost of a rebuild for an underinsured property, leaving policyholders exposed. The top five property types most likely to be underinsured are:

• Nursing homes and care homes

• Health centres and surgeries

• Public houses, licensed premises and hotels

• Offices

• Schools/education³

If rebuilding costs continue to increase, organisations that have not reviewed their cover recently could face a shortfall in the event of a major property claim.

Here’s how that could work in practice.

If the property is underinsured, 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, the financial impact could be much harder to manage.

As an example, say the cost to rebuild a property is £500,000 but the sums insured are set at £250,000, or 50% of the value at risk. Any claim would be settled at half of its value. In this case, a total loss could result in a payment of only £250,000, while a partial loss of £100,000 might result in a settlement of only £50,000. This is known as the application of average, where the insurer may reduce the claim payment in proportion to the level of underinsurance.

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.

There may 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 just 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

• Professional fees

• Compliance with current Building Regulations

• Any extensions or significant refurbishments

• Location and access constraints

• VAT

It’s worth seeking expert advice and reviewing figures regularly to make sure sums insured remain accurate. Historic buildings are especially difficult to value, so it’s even more important to seek guidance from heritage specialists when setting building sums insured.

If you're unsure if your building sums insured is adequate, it's best to check with your broker or insurer about reviewing your cover or arranging a professional valuation.

Ecclesiastical has an established in-house team of surveyors trained to deliver insurance building valuations for customers, subject to eligibility criteria. Our valuations reflect the factors detailed above and are based on cost information derived from many years' experience insuring and valuing a wide portfolio of buildings ranging from the medieval to modern era.

Where a policy is subject to the condition of average, if we have completed a building valuation which you have accepted or if we accept any other professional valuation provided by you and we have applied an average waiver to the policy, average will not be applied in the event of an insured loss.

The valuation must have been completed no more than 5 years prior to an insured loss, completed in respect of the building to which loss has been sustained and adjusted to reflect building alterations and the effects of inflation in the intervening period.

If you have questions, speak to your usual Ecclesiastical contact or broker. Ecclesiastical customers can also contact us via the risk advice line.