Opposition politicians are telling Government ministers that the stamp duty holiday has been an unmitigated disaster for UK housing policy, resulting only in a rocketing of property values. But could the average increase in domestic property value (£21,956)[i], catch you out in a property insurance claim?
With prices having risen 13.4% in the year to June 30, 2021, there is that potential, if your sum insured on your buildings insurance policy was very close to the actual rebuild value of the property. That sum insured is typically based on either the rebuilding cost or what is known as the ‘value at risk.’ If your figure was almost spot on for what you predicted the rebuild cost or value at risk to be, it’s probably time to get that sum insured reviewed.
What costs should be included in a buildings sum insured?
Another reason for doing this now, is that the rebuild cost of a property consists of various components that could also have suffered inflationary pressures. Property owners need to stop thinking about it in terms of the value of the house on the open market and actually in terms of the materials it would take to recreate, the labour costs involved, the professional services fees that would be required as you deal with lawyers, architects and surveyors, the VAT on those services and other factors too, such as removing all the material from the home that has collapsed or had to be knocked down.
Brexit has seen some construction workers move back to their European homes, leaving some shortages in the labour market, which have caused wage rises. Raw materials are hard to come by, due to both the pandemic and Brexit, and the cost of those too is soaring. Architects and other professionals, having to face major price hikes in the cost of their professional indemnity insurance could be passing those on in the form of higher fees. The disposal cost of building materials is ever-increasing, as landfill struggles to cope and as the disposal of some materials, such as asbestos, requires evermore careful handling.
Why you need to get your buildings sum insured right
There is very good reason to factor all of this in and check that rising house prices, coupled with increased costs, are not pushing the rebuild value of your property beyond the sum insured on your home or commercial insurance policy. The sum insured is crucial, as it is on that value that the pricing of your policy, and so the contract that you have with your insurer, is based. If it is wrong, you are providing your insurer with an opportunity to potentially refuse to pay your insurance claim, or to vastly reduce the payout that you receive.
This is because they can argue that you deliberately misrepresented the value at risk of your property when taking out the cover, or can apply the rule of average to your claim. Whilst most policies that allow for the application of average are commercial ones, some domestic policies do contain this clause and sometimes insurers will use it, even when the policy does not mention it, as the Financial Ombudsman has observed.[ii]
Average in buildings insurance claims
Average allows for an insurer to reduce the cost of a claim pro rata in the ratio that the sum insured bears to the value at risk. So, if you insured a property for £70,000, when its value at risk was actually £100,000, you would be 30% underinsured. The insurer could then pay just 70% of the amount that the property owner had insured for, i.e. £70,000, paying the claim to a value of just £49,000. In this scenario, the homeowner seeking to rebuild their home would be £51,000 short, due to having underinsured their property.
Sums insured on home and commercial insurance policies should be index-linked to inflation but with all of the other forces affecting the housing market, that may well not be sufficient. If you haven’t examined your sum insured for some time, now is the time to put that right. Online tools should help you calculate what your sum insured should be, which may not be what it currently is, particularly if you have owned your home for some years and never reviewed it.
Overturning a declined sum insured claim decision
Calculating the rebuild value of a property is something that can be subjective, however, and one loss adjuster’s opinion need not necessarily be the basis for either a declined claim or the application of average to be justifiable. There are many things to factor in and the policy wording and way in which the policy was sold or renewed can also affect the final outcome.
If you do have your home or commercial property insurance claim declined on the basis of underinsurance, it would pay to source professional assistance, to make your case with clarity and in a compelling way. This is where using the services of your own loss assessor, to counterbalance the services provided to the insurer by the loss adjuster, can be crucial. Here at Aspray, any of our loss assessors would be able to cut through the jargon for you, check whether the insurer has used a sound basis for calculating the sum insured and determine whether any errors have crept in.
They would also focus on what guidance you were given at the inception of the policy and whether you could seriously have been expected to know how to calculate what needed to be covered. Their other know-how and expertise could be crucial, when it comes to the basis for calculation.
Other reasons to use a loss assessor in total loss property cases
In addition, an Aspray loss assessor will determine whether the insurer is dealing with the matter in a fair way, as there is often a 15% degree of leeway provided with sum insured calculations.[iii] If everything is being viewed as black and white, but considering grey areas would be the fair thing to do, your own loss assessor can make that point, as Aspray’s team often do. By challenging in this way, and on the basis of experience, they can often deliver a different outcome from the first ‘ruling’ on a total property loss scenario, whether that is to change the decision from declined claim to paid claim, or to increase the amount of the final claim payment.
For help with your property insurance claim, whether domestic or commercial, and whether related to underinsurance and your sum insured or something else entirely, be that caused by flood, fire, weather or vehicle impacts, vandalism, pests, or something else, please call us on 0800 077 6705. Once you have your own loss assessor on board, things could start to move in the right direction for you.
[iii] An Insight into Insurance Rebuilding Costs, by John R Carey BSc MRICS ACILA 31st May 2016