Commercial property values dropped in September but that doesn’t affect the rebuilding cost of a property.
You may have seen recently in the press that according to the latest CBRE Monthly Index capital values across UK commercial property fell -0.4% in September 2019, and rental values and total returns were flat.
Any correction in real estate prices caused by poor performance and the sluggish nature of the economy shouldn’t lead you to believe that your property building reinstatement cost is unlikely to have gone up.
In the third quarter of 2019, UK commercial property capital values decreased -0.9% overall, the fourth successive negative quarter and the weakest of 2019 so far.
For example currently Index-linking is hovering between 2.5% – 4.5% in both the residential and commercial sectors.
A building’s market value is not relevant for insurance purposes and its use for building sum insured is a frequent source of underinsurance.
What is underinsurance
Property insurance policy wordings typically include a ‘condition of average’ clause. When underinsurance is present, this condition enables claims settlements to still be made under the policy but reduced in proportion to the level of underinsurance.
e.g. if a policyholder undervalues their total buildings value by 50%, and therefore only pays 50% of the premium that should have been due, they can only expect to receive 50% of a buildings claim’s total value.
It is estimated that around 80% of commercial properties could be underinsured!
What to consider when setting the value
The amount of money it will cost to rebuild, or reinstate, a property depends on such factors as its construction, style, quality, condition and location, as well as considerations such as building regulations and the cost of labour. In some parts of the country, and with certain types of property it can be that the market value is only a very small percentage of a building’s rebuild cost.
Buildings sums insured need to reflect the full cost of reinstating a building following a total loss. In addition to materials and labour, this includes all associated costs such as demolition, debris removal, planning and professional fees.
Each building will have features that can significantly alter a reinstatement cost, such as difficult site access, period features or specialist construction techniques.
Many property owners’ policies will not apply an average clause if professional valuations are undertaken at least every three years by a RICS qualified surveyor.
A qualified surveyor will have the expertise to identify and quantify these factors, and one should always be engaged when establishing sums insured for insurance purposes.
The benefits of having an up-to-date valuation
- Ensures your Buildings Sum Insured is adequate.
- Significantly reduces the risk of an underinsurance provision being applied to reduce the amount payable in the event of a claim.
- Enables the insurer or the loss adjuster to immediately focus on the claim rather than any underinsurance issue which might delay the repair process and lead to potential unrecoverable increased costs.
- Provides good corporate governance for any commercial business, helping to protect the rights of directors, employees and shareholders in the event of any insured major disaster.
- Allows buildings of historic or environmental value to be restored without being lost to the wider community due to a lack of funds.
- Provides peace of mind to all parties of the insurance contract.
If you need more information about obtaining a RICS valuation or want to know how Arlington Insurance Services can help you with this our contact details can be found here.