With the temptation to cut costs stronger than ever before, commercial property owners may face huge financial shortfalls if they do not insure their properties to the full reinstatement value.
The latest research from Norwich Union, soon to be Aviva, took a sample of 128 valuations carried out by the insurer and revealed that 86% of those properties surveyed were significantly underinsured, with the difference totalling £314m – an average of £2.45m per property. Similar survey results issued by professional surveyors in recent months have all highlighted this worrying trend.
Barrie Etchells, Managing Director of Belmont International, said: “Every property needs to be accurately valued in order to ensure that the owner receives the full amount in the event of a claim so that it can be reinstated and properly rebuilt. People often mistakenly link property market values with rebuilding costs when the truth is that there is no comparison. Just because property prices drop, rebuilding costs do not, they continue to rise. The result is that people often just renew their insurance without going through what they believe is the hassle of getting the property accurately valued. The result is underinsurance which gets compounded year on year if left unchecked.”
The Norwich Union has found that as many as 50% of claims for damage to buildings are being settled below the cost of reinstatement, which could have a significant impact on property owners who would have to fund the difference themselves.
Barrie Etchells added: “Until recently property owners would have had the option of borrowing money to meet the surplus cost needed to rebuild. However, in the economic climate, limited access to credit and given the fall in the value of commercial property, banks are increasingly unlikely to lend against commercial property. With a significant shortfall in the amount being offered by the insurer the owner would then have to sell their property at a greatly reduced price and undermine their business.
“Underinsuring can also have serious consequences for the directors, trustees and those directly responsible for arranging insurance cover as they may find themselves personally liable for the losses if they have not taken steps to arrange and maintain adequate cover.”
To avoid underinsuring a property it is therefore important that property owners organise a professional valuation to ensure it is valued for the correct amount to rebuild or reinstate the premises.
When insuring the buildings it is important to remember to include the replacement value of fences, garages and other outbuildings, as these are frequently forgotten but must be taken into consideration when calculating sums insured.