Dear Property Owner,
As a niche Property Owner’s Insurance Broker, and in advance of your upcoming renewal date(s), we are endeavouring to alert you, and all Property Owners / Landlords, to the very serious consequences of being underinsured.
As you are no doubt aware, for the first time in a generation we are witnessing high levels of inflation, which as well as the effect to the cost of living also has a direct impact on the adequacy of insurance cover. This is further complicated by the continuing shortage in availability of materials & labour, both of which are having an adverse effect on the cost of claims and resultant longer timescales in both reinstating damaged property and the claims settlement.
Construction cost inflation is at an all-time high and continues unabated in 2022 (c.+13.4% in 2021 alone, and +7.5% in first half 2022 already…according to SCSI and +29% on average across Ireland between May 21 and Sep 22). This means that if you haven’t adjusted upwards your ‘Building Sum(s) Insured’ on your property insurance policy(ies) in recent times, you are likely to be underinsured, potentially grossly underinsured if you’ve not adjusted it for many years.
Under-insurance occurs when the sum insured on a property is less than the amount it would cost to rebuild or replace the property (the rebuild cost, or reinstatement value). In the event of a claim, and where a policyholder is deemed to be under-insured, an insurance firm can reduce the sum it must pay against the claim in proportion to how much the policyholder is under-insured if there is an average or underinsurance clause in the policy.
e.g. if you were deemed 20% underinsured in the event of a claim of any size, your claim will be deducted by that 20%, by virtue of the Underinsurance Condition (also known as the Average Condition) applying to most if not all forms of property insurance policies i.e. you bear a rateable share of the risk if you are not adequately insured.
The cost of re-building Your Rental Property has increased considerably over the last 18-24 months and indeed it has every year for the past c.9 years. It is not expected to reduce in the short term.
It is YOUR DUTY (under any property insurance policy) as owner of the property to insure for the FULL COST OF REINSTATING YOUR PROPERTY at each & every renewal date. You need to set that sum insured correctly every year at renewal time, we cannot do it for you as we are not surveyors.
It is a fundamental principal of insurance that the values insured accurately reflect the values at risk and these should therefore be fully reviewed periodically (e.g. at least at each renewal).
It is NOT the market value you need to insure for, it is the RE-BUILD / REINSTATEMENT value, to include the likes of site clearance, demolition, professional, fire and planning fees and VAT.
There is no rule of thumb available as such (apart from on Society of Chartered Surveyors Website) – see https://scsi.ie/consumer/build/calculator/ for ‘estate type houses built since 1960’s’
DO NOT rely on anecdotal cost per square foot figures thrown out in a casual conversation…they are likely new build cost figures and not re-build cost figures, which are uniquely different.
You will need to instruct a qualified property surveyor to carry out a reinstatement appraisal of your property to include provision for future inflation also, where possible (or adjust for this yourself when you have your valuation figure).
It is not hugely expensive to do this anymore, but could be hugely expensive if you don’t.
If you get this done, you can adjust your building sum insured thereafter at each future renewal date in accordance with widely available (annual) construction cost inflation data e.g. (AGAIN +13.4% in 2021 alone, and +7.5% in first half 2022 already…according to SCSI and +29% on average across Ireland between May 21 and Sep 22)). Start as you mean to go on and get it right now!
A very recent claim occurred in Dublin where the policyholder was 67% underinsured. A c.€150,000 property damage claim lodged was automatically reduced to c.€49,500 by virtue of the Underinsurance (Average) Condition in the policy.
We cannot overemphasise the importance of this. We appreciate there is a reluctance with policyholders to increase their buildings cover as it will inevitably cost them more premium in the short term. Some haven’t done it in many years and continue to renew the same buildings figure every year. However, it shouldn’t be about this, as the financial hit to you in the event of an underinsurance issue could mean you immediately land in financial difficulty, potentially having to rebuild a property from much of your own personal funds. Or if funds aren’t available to rebuild it, you could end up with a damaged property which is earning little or no rental income and may have to be sold (at a discount) in that state of damage. You could also potentially end up bankrupt with a mortgage still outstanding.
Please today take a look at your policy schedule, assess how long it has been since you last reset or adjusted your building sum(s) insured upwards. Don’t guess a figure to save yourself the cost of a valuation, you’ll likely be wrong. Get some advice on it, a reinstatement valuation being the best course of action. Come back to us with that figure and increase your cover asap…
NOTE – An insurance broker cannot advise you on the rebuild value of your property. We/they are not surveyors. That’s up to you to ascertain by seeking advice from a qualified building surveyor.
81% of Landlord policyholders have NOT re-set their building sums insured to the correct level in three or more years.
Do you want to be in that 81%, or in the 19% that have done it and are well prepared for when a property damage claim occurs?
The same advice goes for your Landlord’s Contents sum insured (i.e. the ‘replacement as new’ cost of a fit out of a unit is up by more than 20% in the last 12-18 months). You should insure for the full cost of replacing ‘as new’ the contents provided with the letting.
Also, Loss of Rent sums insured…rents have increased hugely over the last few years, yet policyholders are not adjusting their rent sums insured upwards. Where you insure the buildings, you should insist on covering your maximum potential rental income (incl. rates or service charges if applicable) from the property for a minimum 24 month period, allowing for future rent inflation and/or rent reviews also.
For even further advice on this matter:
2022 Build Cost Guide …https://buildcost.ie/wp-content/uploads/2022/08/Buildcost-Construction-Cost-Guide-2022-2nd-Half.pdf
Or follow Build Cost post on Linkedin … https://www.linkedin.com/posts/buildcost_2nd-half-2022-activity-6970009598577545217-6S9U?utm_source=share&utm_medium=member_desktop
We hope this advice is of help and serves as a timely alert to do something about it NOW.
Do contact us on 824 5555 or email us at firstname.lastname@example.org when you have your reinstatement figure(s) and preferably a month in advance of your renewal date (or this can be done at any stage during your policy period).