Building insurance is designed to provide an important safety net, allowing protection of property assets against unforeseen events for property owners and investors.

Insurance is there to offset the cost of rebuilding work or repairs after an insured event such as flood or fire, but for many owners from commercial and domestic property backgrounds that important security may not be as it seems.

Many UK properties are in fact underinsured and without the adequate building sums insured. The number is rising and causing more to be at risk of having incorrect cover and will be left a hefty bill if an incident was to occur.

Potential outcomes

The insurance cover gap is something not to be ignored as it can have a significant financial impact if there is the unfortunate need to make a claim. It has been shown within market research that underinsured buildings only hold cover for around 68 per cent of that required. This can lead to two potentially disastrous outcome in the event of a claim.

First, the insurer can apply a ‘Condition of Average’, a clause in many buildings insurance contracts that allows insurers to reduce claims on underinsured properties.

For example, a property owner claiming £100,000 to cover repairs after an insured incident could potentially only receive £68,000 in settlement if only 68 per cent of the property value is covered by the insurance policy.

Second, and an even worse outcome, in certain cases of underinsurance, the insurer could warrant the policy invalid as the client failed in their duty of fair presentation under the Insurance Act – and remember, it is the responsibility of the property owner to ensure that valuations provided for insurance purposes are accurate and true.

Inaccurate property valuation

The most common misconception when it comes to property cover is that market value and insurance value are interchangeable. This is not the case. The insurance valuation is done to determine the rebuild cost of the property, which includes several costs that are not covered within the market valuation.

It includes materials and labour, but also the cost of site access and the rebuild value of areas surrounding the property, such as car parks, outbuildings, or trees. The bottom line is that a property value for insurance purposes must mirror the definition of buildings set out in the policy. 

Rise in construction costs

Following the issues in under insured it is clear that many buildings that were valued accurately at the time of the insurance being taken out are now pushing to being under insured due to the rise in labour and building material costs. This meaning that those properties that were already under insured will be pushed even further into this difficult situation.

There are many factors involved in the rising constructions costs, such as COVID-19 delaying or postponing building works, the effects of Brexit following the loss of many foreign workers. These are a few issues but many that are contributing to this ongoing problem.

At the other end of the spectrum the cos in materials such as timber and sheet material has risen so much that in some cases it has more than doubled. Meanwhile the demand for overseas materials has then extended the timing causing delays and adding cost to the overall building work.

Inflation is removing the safety net

It is assumed by many that there is something to support in these increases such as day one uplifting clauses within buildings insurance policies and inflation indexing for residential property, but unfortunately this may now not be the case.

Due to the dramatic rate that inflation is moving it is pushing far beyond the baseline of this support in place. This meaning that the inflation linked uplift within insurance cover will more than likely fall below the increase now seen, driven by the cost of labour and materials.

How to address underinsurance

The main point from this is that around 80% of properties are currently underinsured. Baring this in mind, we advise for all property owners, whether residential or commercial to act now by reviewing buildings insurance policies. It is important to pay attention to the stated rebuild costs and sums insured.