INSURING YOUR PROPERTY…

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UNDERINSURANCE AND THE INSURANCE POLICY CONDITION OF AVERAGE

One of the most important things to consider as a property owner is ensuring adequate insurance cover is in place in respect of damage to the building, landlord’s contents, and loss of rental income. It will also be a requirement of any financial lender that the building is adequately insured.

It is important when arranging insurance cover that the correct insurable sum is established.

When setting the sum insured it is a common error on occasion to select the market value of the property. In the event of physical damage to the property, the loss sustained by the owner on the majority of occasions will be the cost of repairing the damage, and that is the basis on which the sum insured should be considered.

The sum insured for the building should represent the full cost of re-instating the building (incl. outbuildings, driveways, boundary walls etc) to as near as possible the specification it was in prior to a loss occurring. The sum insured should include;

• An allowance for demolition and debris removal
• Reinstatement of the building to comply with current building regulations and local authority requirements
• Inflationary factor to cater for increase in building repair costs during the course of construction (a building could be totally destroyed on the last day of insurance cover almost one year from the initial inception)
• Professional Fees (Architect/Surveyor/Engineer)
• If a Landlord is not VAT registered, then the VAT element of the building repair cost (currently 13.5%) and on Professional Fees (currently 23%) should be included.

The consequences to a business of inadequate insurance cover should not be taken lightly, as can be demonstrated as follows;

• If a building is insured at €500,000, and following total destruction by a fire costs €1,000,000 to rebuild, then the owner is left with a €500,000 shortfall
• Insurance Policies contain an underinsurance penalty clause called ‘Average’ which proportionately reduces the sum payable in respect of any claim in the event that a property is inadequately insured. In the most simplistic terms, a property insured for €500,000 which will cost €1,000,000 to rebuild if it was destroyed is only insured for 50% of its rebuilding value. Therefore, in the event of damage which costs €100,000 to repair, the Insurer will only be liable to pay €50,000, being 50% of the claim.

It is recognised within the insurance industry the need for protection to property owners to avoid un-necessary over-insurance. Inflationary factors and changes to VAT rates cannot be predicted and where multiple buildings are insured, it may be considered that a total loss of all buildings from one event is unlikely. There are various methods of dealing with these factors, and an experienced insurance broker should be consulted to consider the most appropriate insurance product.

When considering the sum insured for Loss of Rental income, two factors need to be considered;

• Period of cover – What time period will be required to repair a building following total destruction? If 12 months would be considered sufficient, then a 12 month period of cover can be selected. However it is seldom the case that any sizeable property which sustains serious damage can be re-instated within a 12 month time period and a period of 18 months, 24 months or even 36 months may be considered appropriate.  It is advisable to ensure that additional time is allowed for the fitting out and re-letting of the property.
• The sum insured should be set at the maximum loss of rental income which may be sustained during the indemnity period. For example, if the property contains 4 fully occupied apartments each producing rental income of €12,000 per year and a 12 month period of cover is selected, then the sum to be insured should be €48,000. If a 24 month period of cover is selected then the sum insured should be €96,000.

Landlord’s contents (which may comprise contents of common areas and/or individual flats / apartments) should be insured for their estimated replacement value.

Whilst the setting of loss of rent and contents sums insured may be a relatively straightforward process, establishing a rebuilding cost for a property can be a more complex matter. Further guidance on this is given in the following article.

Remember:  It is vitally important when arranging property insurance cover, that the correct risk details and adequate reinstatement values are provided.

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