Why should you have your building revalued every three years for insurance reinstatement purposes?
— 16 Sep 2020 08:08:06 by Nick Mills
A key role of a managing agent is to ensure that in the event of fire, flood or other ‘insured peril’, every building entrusted to their management has adequate insurance cover. The buildings insurance policy will cover damage to the structure of the building and all those fixtures and fittings attached to the structure. The total value of this cover, taken as a worst case scenario with total devastation, is referred to as the ‘sum insured’.
Every residential long lease will state that the freeholder or management company must properly assess and maintain adequate insurance cover and this is usually arranged through their managing agent or directly with their broker. However, the level and terms of cover are not considered often enough in most cases, which can have some very serious consequences.
The Royal Institution of Chartered Surveyors (RICS) recommends that a firm of Chartered Surveyors completes a revaluing exercise on every building for insurance purposes every three years.
Is this really necessary?
The answer is a resounding YES!
These are some of the reasons why …
- The cost of the annual insurance premium, which is paid by the leaseholders usually through their service charges, is directly related to the size of the sum insured figure. The insurers will increase the sum insured figure through indexing every year by 2-3% but this not linked to housebuilding costs and it doesn’t take long before the sum insured figure is incorrect. The annual premium also rises accordingly. Unless a valuation is completed regularly, there is every likelihood that the building is over or under insured.
- In the event of a large insurance claim, the insurers will ask for evidence that a valuation has been completed by a Chartered Surveyor within three years of the claim. If evidence cannot be provided, they will arrange their own valuation at the expense of the insured. If as a result of their valuation, the building is found to be over or under insured, the claim settlement figure could be reduced by the same percentage.
For example, if there was a large fire in a flat which caused damage to the structure, other flats in the building and neighbouring buildings, the total claim for the cost of reinstatement could easily be £500,000. If the insurers were able to show that the building was 30% under insured, they would only pay 70% of the claim, or £350,000 towards the cost. The remaining cost of £150,000 would need to be paid by the freeholder or management company and any directors could become personally liable. In this event, it’s also unlikely that any directors and officers insurance policy would cover these financial losses.
- By not having the building correctly insured, the freeholder or management company is likely to be in breach of the terms of the lease agreement. Leaseholders could recover the cost of any inflated premiums for previous years through application to the First Tier Tribunal. Incorrect charges for insurance premiums may also make it difficult to take legal action against leaseholders for the non-payment of service charges. Where a Right to Manage (RTM) company operates, this breach is also enough reason for the freeholder to be able to wrestle back control of the daily management of the building.
If we manage your building, do speak to your Property Manager for confirmation that your building has been revalued recently.
Alternatively, to obtain a quote from our Surveyors for their valuation service and a timescale for completion, please contact Mark Deacon or Jack Peacock.