When the sum insured on a property is less than the amount it would cost to rebuild
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 process.
Construction cost inflation has been at an all-time high and continues, albeit slower, in 2024 (per SCSI c.+44% across Ireland in the calendar years 2018-23. Separately (+21% Oct 2021-22 / +12% Oct 2022-23 / +3.9% Jan 23 – Dec 23 / +3% Jul23 to Jun24). ALL figures quoted are ‘on average’ across Ireland with some regions higher than others. 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 for many years.
Under-insurance occurs when the sum insured on a property is less than the amount it would cost to rebuild / 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.
This means that if your property is insured for only 70% of its true value, you will only be indemnified (paid) for 70% of your claim costs and will have to finance or fund the remaining 30% yourself. What if you were deemed to be 50%+ under-insured? Not even worth contemplating!
It is a fundamental principal of insurance that the values insured accurately reflect the values at risk and these should therefore be fully reviewed at least at each renewal. In the event of a claim being notified, the first thing the insurer’s loss adjuster will do is assess whether you are adequately insured or not by using current published and industry building cost data. It’s your insurer’s way of making sure you only get what you pay for!
It is NOT the market value you insure for, it is the RE-BUILD / REINSTATEMENT value…
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.
N.B. – Re-building costs are higher than (new) Building Costs as they factor in many additional cost aspects including but not limited to demolition, site clearance, professional, fire & planning fees & VAT. There can be significant differences between them.
If you get a Professional Reinstatement Valuation done by a Chartered (Quantity) Surveyor, you can adjust your building sum insured thereafter at each future renewal date in accordance with widely available (annual) construction cost inflation data.
N.B. – A ‘contract of insurance’ (like any legal contract) has obligations for both parties to the contract. The Insurer promises to pay claims on the occurrence of an insured peril/event causing damage or loss to you or a third party. The Insured (you) commits to insuring the property at the full reinstatement value so that the Insurer can apply their ‘premium rate’ to that value, and obtain a fair premium for the risk that you have fairly presented to them (i.e. the reinstatement value is one measure of the risk exposure presented to the insurer).
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. 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. REMEMBER, your landlord insurance premium should be FULLY TAX DEDUCTIBLE!!!
Please today take a look at your policy schedule, assess how long it has been since you last adjusted your building sum(s) insured upwards. Don’t guess a figure, you’ll likely be wrong! Get some advice on it, a Reinstatement Valuation being the best course of action.
Consider also your Landlord’s Contents sum insured (i.e. the ‘replacement as new’ cost of a fit out of a unit or common areas is up by in excess of 20% in the last 24 months). You should insure for the full cost of replacing ‘as new’ the contents provided with the letting.
Loss of Rent cover…rents have increased hugely over the last few years, so rent sums insured should be adjusted upwards to reflect this. 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.
TO FIND a Reinstatement Valuer to assist in providing a reinstatement valuation – TRY https://scsi.ie/my-public-detailsfind-an-expert/ and search ‘VALUATION SURVEYOR‘ in your area / county.
Oct 2023 SCSI House Rebuild Rates Guide – https://scsi.ie/consumer/build/calculator/ i.e. FOR ESTATE TYPE HOUSES BUILT SINCE 1960’S ONLY…not for pre-63’s or commercial property etc.
2024 Build Cost Guide … https://buildcost.ie/wp-content/uploads/2024/08/Buildcost-Construction-Cost-Guide-2nd-Half-2024_compressed.pdf
We hope this guidance is of help and serves as a timely alert to do something about it NOW.
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