Rising build costs bring underinsurance risk

In the majority of insolvencies or receiverships buildings form the bulk of the asset values.

Insuring those assets adequately is key to ensuring returns to creditors are maximised.

However, recent research has found that 80% of UK properties are underinsured –in context, that’s around 587,000 properties with a total value of £340bn standing without adequate buildings insurance.

What’s more, those numbers are increasing, having risen from 580,000 and £325bn respectively in 12 months.^[1]

Disastrous outcomes

This insurance gap is not something that can be ignored, because it can have a significant financial impact if the time comes to make a claim. Research tells us that, on average, underinsured buildings are covered for just 68% of the amount they should be.In practice that could lead to two potentially disastrous outcomes if a claim occurs.

First, the insurer could apply ‘Condition of Average’, a clause that enables insurers to reduce claims on underinsured properties by the corresponding percentage. For example, an insured claiming £100,000 to cover repairs after an insured incident may only receive a £68,000 settlement if 68% of the property value is covered by insurance.

Second, in extreme cases of underinsurance, the insurer could even say that the policy is void as the client failed in their duty of fair presentation under the Insurance Act – and remember, it is the responsibility of the insured to ensure that valuations provided for insurance purposes are accurate.

A couple of the issues contributing to this trend are:

Inaccurate property valuations

There is a common misconception that a property’s market value and its insurance value are interchangeable. In reality, an insurance valuation refers to the cost of rebuilding a property, which would include a range of costs not covered by a market valuation.

They include materials and labour, the cost of site access, and the rebuild value of areas surrounding the property such as car parks, outbuildings, or trees.

Rising construction costs

It is often the case that businesses or individuals who have been struggling financially may not have incurred the cost of recent professional valuations and merely relied on historic figures.

To make matters worse, buildings that were accurately valued when a policy was taken out may be tipping over into underinsurance now because of steep rises in the cost of building materials and labour. Clearly that means the situation is worsening for any property that was already underinsured due to an inaccurate valuation.

The facts are stark. Pent up construction demand built up during COVID-19 lockdowns, along with the effect of Brexit on EU imports and the loss of around 1.5 million foreign workers since the beginning of 2020, had driven construction prices up by as much as 15% in 2021.

Meanwhile, price rises for specific building materials have been even higher – timber prices have risen by 20-50%, while heightened demand for construction materials overseas has also extended lead times for virtually all materials, which may again add costs to building works.

Act now to address underinsurance

The bottom line, according to the research, is that 80% of UK properties are underinsured and those properties are, on average, only insured for 68% of the true value.

With that in mind, our advice remains to review buildings insurance policies upon your appointment, paying particular attention to the accuracy of rebuild costs and sums insured.

What can you do?

Speak to your local Marsh contact for a range of solutions. Additionally, look out for further materials on this topic and others later this year.

^{Sources:

[1]}^{Property Underinsurance Infographic}

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