Assessments & Desktop Valuations
The Association of British Insurers recommend that after the first full building insurance assessment is carried out (when the building is first completed), rebuilding revaluations are carried out every 3-5 years. This should be budgeted for, instead of allowing a sudden spike to occur when the valuation is due.
In addition a desktop valuation should be provided each year just before the insurance policy requires renewing. They cost much less and using the same surveyor when the next assessment is due often means they are willing to give this service without the need to re-visit site. Having said that, if there is a change in surveyors then they should attend the development for the first valuation they carry out. This will make sure that a) the building is insured correctly in each service charge year, and b) confirms that the policy leaseholders pay for is correct and c) minimises the risk to the landlord, agent and management company.
Declared Value and the Sum Insured
There are distince differences between the declared value and the sum insured.
The Reinstatement Cost Assessments (formerly known as the Building Reinstatement Valuations) are to make sure that the declared value (cost to rebuild in full) of the property is correct on the insurance policy.
The RICS defines the declared value as ‘the cost of rebuilding and associated on-costs on the basis of a total loss or of such substantial damage that the entire building will require demolition and rebuilding, at the level of costs applying at the commencement of the insurance period without any provision for inflation’.
It is usually calculated on the following:
- Type of construction;
- The age of building;
- The number of floors;
- It’s location and amenities
It is important to be able to identify where this value came from because whilst it could have been professionally valued in the past, it may also have been provided by the developer. If so, this would likely have been based on the sale prices of the flats, making the figure much higher than it should be. In any event the insure/broker will need to know what it is this because this is what the premium is based upon.
The declared value will also determine if the building is over or under insured. If it is under insured then insurers can restrict the amount they pay out in proportion to the under valuing (average). For example, if the cost of rebuilding the property was £120,000 but it was insured for 20% less, the insurer can say that the property is under-insured by 20% so it will pay out 20% less from the claim leaving leaseholders ending up paying towards the cost of the claim.
If the building is over insured then the insurers won’t pay out any more than the building costs to rebuild and leaseholders will have paid a higher premium for nothing unless they get a determination from the First Tier Tribunal, requiring management to re-pay the leaseholders any premium over-payments.
The sum insured is simply how inflation is handled by the contract during the insured period. No increase in inflation is required during the insured period or during the time it takes to rebuild the property following a claim. A ‘Day One’ clause provides protection from inflation for the perod of insurance for a given percentage of uplift figure, usually between 10% and 50%.
When the insurers receive the ‘declared value’ figure they will confirm what the total sum equates inclusive of the ‘day one’ protection.
For example a rebuild figure of £500,000 representing the declared value with a sum insured of £600,000 if the policy contains a 20% day one uplift clause.
Declred value and declared uplift are often confused and if the former is wrong then problems may well arise with under insurance as the day one uplift is only designed to protect against inflation, not incorrect declared values. The average clause will still apply.
When buildings insurance is arranged on a day one basis then the insurers will need to know the declared value, not the sum insured.
At the time of a complete loss the insurers will pay the maximum of the declared value plust the amount by which it has increased due to inflation stated at the start of the policy period with no extra premium being paid.
INDEX LINKING AND RELATED COSTS
Because neither the market value of the property or the council tax valuation band are an exact guide to the rebuilding cost, and because building costs do not rise and fall with inflation, buildings insurance should contain automatic index linking. This is based on the national average of increasing construction costs and whilst most policies that contain this use the RICS Index, any other index linking that is used will also show on the policy.
Note: Index linking doesn’t take into account regional and building variations.
It is also important to remember that there is no allowance made for anything other than the rebuild cost, so any related costs incurred when the building was constructed such as the cost of the removal of debris, shoring up of party walls, professional fees or unrecoverable VAT, may well not be part of the calculation.
Any other structures within the boundaries of the property will also have to be included as well as ground rent and alternative accommodation. Clarification on whether these have been included in the final figure will need to be obtained from the insurance company.
Note: Under many leases, the costs of the revaluations are usually recoverable from the service charges.