Rebuilding Costs and Other Valuations
Insurers require blocks of flat to be insured for an amount equivalent to the total rebuilding cost which can be very different to the combined ‘market value’ of all the flats within the block. Neither the market value or the council tax valuation band are a precise guide to the rebuilding costs and as building costs do not rise and fall with inflation, buildings insurance should contain automatic index linking. This ensures that the declared value increases in line with inflation. This is based on the national indices of increasing construction costs but the actual cost can vary on a regional basis. Whilst most policies that are index linked use the RICS Index, any other index linking that is used will also show on the policy.
The Association of British Insurers recommend that after the first full buildings insurance assessment is carried out (when the building is first completed) the rebuildings valuation is carried out every three to five years because being index linked doesn’t take into account regional and building variations. So, over time, the rebuild value may differ from the buildings true valuation. This should be budgeted for, instead of allowing a sudden spike to occur when the valuation is due. Our managing agent allows for this by splitting the cost into thirds, instead a one-off charge every three years.
As well the costs of re-building of the main structure of the premises and it’s fittings, there is no allowance made for anything outsideof that cost so any related costs incurred when the building was constructed should be taken into consideration such as::
- Garages, refuse bin housings and bicycle parks within the main boundaries of the property;
- Party walls;
- Roads, paths and landscaping;
- Underground pipes & sewers;
- Costs of debris removal.;
- Communal contents;
- Improvements to individual flats;
- Professional fees;
- VAT, which even though it is not applicable to new builds, repairs are.
Note: Under many leases, the costs of the revaluations are usually recoverable from the service charges.
Declared Value and the Sum Insured
Making the correrct assessment on rebuild costs is not easy and insurers might not pay a claim in full if the Buildings Declared Value (BDV) on the policy is incorrect (which is also shown as the Buildings Sum Insured).
The Royal Institution of Chartered Surveyors (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:
- Construction type;
- The number of floors;
- Location and amenities.
Identifying where this value originates is important because althouth it could have been professionally valued in the past, it may also have been provided by the developer. If so, it would likely have been based on the sale prices of the flats, resulting in 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.
There is a distinct difference between the the sum insured and the declared value:
- The sum insured considers how inflation is handled by the contract during the insured period. There is no increase in inflation 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%.
- 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.
At the time of a complete loss the insurers will pay the maximum of the declared value plus the amount by which it has increased due to inflation stated at the start of the policy period with no extra premium being paid.
The ABI also recommend desktop valuations be provided every year, just before the policy needs renewing. The cost is significantly less than the rebuild valuation and using the same surveyor when the next assessment is due often means they are willing to provide this service without a site visit.
So what does a desktop valution involve? Simply looking at the previous year’s declared value to see if there have been a) any changes to the structure or b) any additions to the site and the making of any necessary amendments. If neither apply then no amendments are necessary.
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:
- The building is insured correctly in each service charge year
- They confirm that the policy that leaseholders pay for is correct and;
- The risk to the landlord, agent and management company is minimised.
So, what is the process for making a claim?