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