In the event that something catastrophic happens to your building, does your insurance cover the property reinstatement value?
When it comes to buildings insurance, there is a tendency to assume that as long as you have a policy in place, you are covered for all eventualities.
However, with reinstatements, this can be a dangerous assumption to make.
Fairhurst Estates’ managing director John Thornley why you need to cater for absolutely all eventualities.
Reinstatements refer to the worst case scenario of a building being completely destroyed, whether that involves literally being razed to the ground by some catastrophic event such as a fire, or otherwise left in such a bad state of disrepair that it needs to be knocked down.
The reinstatement value of a property is the amount it would cost to build it again from scratch and restore it to its former state.
This figure is very important when taking out buildings insurance. It makes sense that the maximum value of the cover you take out should be enough to protect you should the worst happen.
The risk of being under-insured
Unfortunately, it is quite common for commercial property owners to have buildings insurance policies which do not cover the reinstatement value, which is fine 99.9 per cent of the time – until disaster strikes. The question owners should ask themselves is, is it worth the risk?
To give you an example, when Fairhurst Estates carried out reinstatement valuations on the portfolio of properties owned by one client, we found that on average each premises was under insured by 16 per cent. So say a property with a reinstatement value of £1 million burnt down, the insurance pay out would leave the owner £160,000 short.
There tend to be two common errors made when taking out commercial buildings insurance, one being not taking the reinstatement value into account at all, and the other not reviewing the reinstatement value regularly enough.
It is commonly assumed that when you take out buildings insurance, you should insure the property for its current market value. But this does not necessarily reflect the reinstatement value. By the time you factor in all costs such as fees for architects and construction contractors, plus buying the materials, the actual price of rebuilding a property to its previous specifications is often considerably more than its market value.
Regularly review property market prices
Because construction prices tend to be more volatile than property market prices, the reinstatement value can change quickly. For example, some sections of the construction industry have seen inflation at rates of up to 10 per cent per annum in recent years, which has a considerable knock on effect down the market chain.
If materials and other costs are rising at those sorts of rates, the reinstatement value of your property will be going up too. That is why regular reinstatement valuations are strongly recommended, because if you leave it ten years or more, you could find yourself underinsured by a considerable amount.
Expert Opinion shared by Fairhurst Estates Limited