What is underinsurance?
The amount you pay for your insurance, the premium, is calculated by looking at the amount of cover you choose to take out and individual considerations such as the building location (is it in a flood zone or likely to suffer from subsidence for example?) If you have not taken out the right amount of insurance to cover your needs, then you are underinsured and may end up having to fill the gap yourselves.
There are a number of factors that you need to consider when you assess how much insurance you need to take out, especially in a heritage or listed building, which may have unique features requiring specialist craftsmen to restore. Whilst it might be tempting to choose a low level of cover to keep the premiums down you need to consider the impact of selecting the wrong level of cover on what you may receive back should you make a claim, and even in the event of a partial loss.
Commercial property must be insured to cover the full cost of demolition and rebuilding, together with any other allowances required by the lease terms. A Reinstatement Cost Assessment (RCA), previously known as Fire Insurance Valuations, is the standard industry method of calculating how much a building should be insured for.
The Building Cost Information Service (BCIS) of the Royal Institution of Chartered Surveyors (RICS) produces a range of detailed guidance on the cost of rebuilding houses and flats. Click here for more information
Should a property be underinsured, the insurers are not obligated to pay the full costs of reinstating the building. Instead, they will apply the Condition of Average Clause, whereby the amount being claimed is reduced proportionately to the value of underinsurance. You will then be liable for any shortfall in the insurance settlement.
The Condition of Average Clause
The “average clause” states that if something is insured for only a proportion of its value, for example half of its rebuild value, the insurer is only liable for the same proportion of the loss, i.e. half, when a claim is made. Because the declared value or sum insured of a property is less than its actual rebuild value, any insurance payment will be reduced by the percentage of under-insurance. It means that you don’t receive a full insurance payment when you have only paid part of the premium.
So should your property be damaged, say by a fire or explosion, you could be liable to pay for a substantial top up to get it re-built. This principle applies even if a claim is made in the event of a partial loss. You will only get the same proportional value for repair or replacement even if the claim is much lower than the total sum insured. Don’t assume that because the partial claim is less than the total sum insured, you would get the full repair costs paid out. This could leave you having to foot the bill for the balance- totalling thousands. Certainly, more than any potential savings you may make with the premiums!
As insurance experts we can connect clients to people who offer both digital rebuild cost assessments and on-site surveys.
Taking the time to look at all the detail of your situation helps us to spot any potential under insurance risks and we can then make sure you get a better deal. With insurance, it’s not just about covering your risk; it’s about covering the risk in an appropriate way. We are independent and have long-running relationships with insurance underwriters, which gives us an advantage in helping clients in tricky situations.
If you want to review your commercial property insurance…
Call us on 01823 250700
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