Underinsurance Warning for Businesses

The Building Cost Information Service, part of the Royal Institution of Chartered Surveyors, has announced that close to 80% of UK commercial properties could be under-insured for rebuild costs by as much as 60%. For a property worth £500,000 this would mean a shortfall of £300,000: a very worrying thought.

The problem could stem from the fact that during an economic downturn, business owners tend to assume their properties have remained stagnant in value. So when they renew their policies, they don't bother to think about increasing the sum insured for rebuilding purposes.

However, it should be noted that the market value of a property is not in question; it is the rebuild costs that need to be considered, and these can vary quite substantially from the value.

Rising Rebuild Costs

Rebuild costs have risen considerably recently, due largely in part to the changes in the Building Regulations that were introduced in 2002 bringing in a range of stipulations that drove construction costs up. These included things like higher levels of fire protection, improved accessibility, energy performance measures and better drainage. Failure to comply with the Regulations is said to have the potential to add 30 per cent to the cost of a build. And then there is the increase in labour and materials costs to add to this. All of this demonstrates the vital importance of reviewing a sum insured for rebuild.

Businesses may also be under-insured for another reason, and that is a lack of risk assessments and professional valuations, again a symptom of cost cutting in the economic downturn. The trouble is, this could be a false economy, especially when you consider the increase in harsh weather events and terrorist threats that could put properties at a greater risk.

Calculating the Rebuild Value

If you think you are able to calculate your own rebuild value, you may wish to think again. There really is a lot to consider, including Building Regulations compliance, local authority planning fees, geological conditions and materials and labour costs. And if your building is older then you may need to include provision for dealing with the likes of asbestos.

Summarising, when you are renewing your buildings insurance, or taking out a new policy, be very careful about the figure you quote as your rebuild cost. The advice is to invest in a professional reinstatement valuation survey to ensure the sum insured is adequate. If you cannot afford to stump up any shortfall yourself, make sure you have sufficient cover.

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