The economy is in flux, with the pound plummeting and inflation already high. As a result, costs to rebuild or reinstate any damaged buildings are increasing, and the risk of being underinsured is going up. So what does this mean for you and your buildings insurance?
Most insurers provide some form of inflationary provisions within their policy, whether that’s simple property index linking at renewals, or day-one uplifts to cater for a certain level of inflation during the policy year. These are designed to protect your building from being underinsured due to economic changes, the construction market, or materials costs.
But when the economy fluctuates significantly, these provisions can become insufficient. In some cases, the sum insured can be left too low to pay to reinstate the property, leading to a potential shortfall, both for full and partial losses.
Below, we take a closer look at what could happen to your buildings cover if you’re underinsured, and the steps insurers can take.
The ‘Average’ formula
If you’re underinsured and need to make a claim, insurers can apply two formulas to calculate your loss, ‘Average’ or ‘Proportional Remedy’. Average is the most commonly used condition. When it’s applied, insurers look to work out if your sum insured was sufficient at the time of the damage, or if you were underinsured.
The clause itself normally offers a little leeway, allowing for your property sum insured to be as low as 85% of the actual value, which gives some flexibility and security. If it turns out the value declared for insurance is below that, then insurers will apply Average, which essentially allows them to proportionally reduce the amount paid from the claim.
Here’s an example in the event of a total loss with Average applied.
A property is insured for £350,000 but should have been insured for £700,000. It’s therefore only insured for 50% of the correct reinstatement value. It burns down and is totally destroyed.
Using Average, insurers would only pay out the maximum £350,000, being 50% of the property value – leaving a shortfall of £350,000.
Let’s assume the fire wasn’t as destructive and only caused £100,000 of damage. In that event of a partial loss, the same 50% formula would apply. So for a partial loss of £100,000, insurers would only pay 50% of the claim value, being £50,000. This again would leave the property owner having to contribute substantial funds themselves to bring the property back into a usable state.
The ‘Proportional Remedy’ formula
This is a relatively new concept for when the policy contains no average clause and isn’t on a declaration basis. In the above case of underinsurance, and if the Average and declaration clauses were absent, the claim may not have been paid at all.
But this changed in 2015. Now, if you don’t insure your property with sufficient sums insured, or disclose the full material facts on the property/policy, insurers will remedy the claim depending on how they would have behaved if the sums insured/material facts were correct – and assuming the underinsurance was due to a misjudgment, rather than a reckless or deliberate act.
Insurers could then reduce the amount of the claim by taking into consideration the additional premium they would have charged if the sums insured were correct, and deducting this off the total settlement amount. If insurers had the correct sums insured values and full facts at the time the policy went on cover, and they would still have accepted the risk but added a higher excess for theft, for example, then this new excess would be applicable as Proportional Remedy.
Support from RiskBox
At RiskBox, we recommend checking your sum insured values every two to three years – and more frequently when the economy is unstable. This isn’t just for your buildings, but for property such as fixtures, fittings, stock, contents and computers, too.
If you insure your property with us and would like help obtaining a professional valuation, get in touch with our friendly team today. You can reach us by calling 0161 533 0411, emailing firstname.lastname@example.org or filling in our online contact form.
Agencies - September 25, 2023
Blog - September 11, 2023