What is meant by ‘buildings sum insured’?
The Buildings sum insured shown in your policy schedule is the maximum amount the insurers will pay for rebuilding in the event of a loss. It should represent the total cost of re-building assuming a total loss, including damage to outbuildings, car parks etc, and should also have an allowance for debris removal costs and professional fees that will be incurred. Additionally, there should also be an allowance for inflation during the period of insurance and any period of rebuilding. As this inflation allowance is difficult to estimate for future years, we recommend you arrange cover on a ‘declared value basis’ (see below).
What does ‘building declared value’ mean?
Policy schedules often show two values on the buildings: one referred to as the declared value and one as the sum insured. The important difference between these two is how the policy protects you against inflation in rebuilding costs. When you calculate the declared value, it is the same as calculating the sum insured except that you do not need to add anything for possible inflation which may occur during the policy period or during the time taken to repair/rebuild following a claim. The policy then includes an allowance (typically adding a maximum of 50%) for inflation during the year and, more importantly, during the rebuilding period, which, in the event of a serious loss, could be a number of years. The insurers will then pay the maximum of the declared value, plus the amount by which inflation has increased the declared value stated at the start of the policy period the added allowance protecting you from inflation, without you paying more premium. Declared value is often referred to as ‘day-one value’. We always recommend you arrange cover on a ‘day-one declared value’ basis.
What if I don’t insure my building for the correct amount?
This can cause major problems. It is a requirement of the policy to insure for the full rebuilding cost . If you do not, insurers may apply a clause called the ‘condition of average’. This means that if you have only insured for half the correct rebuilding cost then, in the event of a claim the insurer may pay only half the claim. In the event of a claim (particularly a large one) insurers will usually ask the loss adjuster investigating the claim to check the declared value of the property.
Insurance re-instatement reports
To avoid under-insuring your building, we recommend that you get the buildings valued by a surveyor with experience of insurance valuation. The valuation exercise should be repeated every three to five years, because although insurers may index-link the sum insured each year, this is based on national indices and the actual cost changes can vary. So over time, your declared value may vary from the true building’s true value
Who pays for the insurance and how is it demanded?
You should refer to the terms of your lease in order to establish who is responsible for insuring the building, what the cover should include and how the cost can be recovered. Usually the lease provides for the landlord to arrange the insurance of the building (not the contents) and charge the cost as a service charge. The cost of the insurance may be challenged before or verified by the First-tier Tribunal (Property Chamber) as with other service charges.
The insurance may be included as part of the overall service charge or it may be invoiced separately. Again, the lease will dictate the treatment.