Domestic Buildings – Sums Insured
Aren’t Eircodes great!
We all remember the criticism circulating at their launch, headline in the Irish Times: “Eircode: there goes another €38m down the drain.” However, those of us born without an internal compass can now pop a code into a screen and via the wonder of satellite and computing technology arrive at the door of a new property claim, stress free…… or maybe not?
Google Maps may have played a blinder, but the absence of navigational stress for the Loss Assessor, is all too often replaced by that sinking feeling when it becomes apparent that the ‘initial driveway view’ of the property, and the ‘Buildings Sum Insured’, have not converged at the same destination.
As claims professionals we frequently visit domestic losses where the Building Sum Insured is inadequate to a lesser, or greater, degree. Unfortunately, domestic policyholders who may have diligently maintained their cover claims free for years (Or sometimes decades) generally only learn of this inadequacy in the event of an actual claim on their policy. It goes without saying that the regard with which the insurer had previously been held is somewhat diminished by the fallout from underinsurance when the Average axe falls! Nevertheless, by engaging the services of a (regulated) Public Loss Assessor at the outset, the effect of any potential Underinsurance can be made the subject of negotiation to mitigate its extent and effect.
We within the industry are all familiar with the operation of Average but it comes as a surprise to many policyholders to learn that it affects their small escape of water claim the same way it does the large fire loss.
When having the all too frequent conversation with policyholders we generally try to explain the implication of underinsurance with a question: “What proportion does the sum ‘actually’ insured have with the sum that ‘ought’ to be insured?” followed by an example: If the sum ‘actually’ insured is €100,000 but the sum ‘ought’ to be insured is €200,000 then you have purchased 50% of the cover you should have, hence the importance in getting this figure correct day one.
Buildings Sum Insured, Value at Risk, Rebuilding Cost Assessment or the Reinstatement Valuation are terms we interchange in the claims sector, but all refer to one important number. But just how much consideration is afforded to establishing this number given its arguably the most important ink on any Schedule of Insurance and generally protects the largest investment of our lives, our home?
First let us consider what it is not. In a significant percentage of cases policyholders believe that the Buildings sum they insure their properties for is the amount that the premises would fetch if sold on the open market i.e. Market Value. It often comes as a shock to Policyholders when they learn that the ‘Market Value’ and the ‘Reinstatement Value’ have no relationship whatsoever. A gentle word of warning here: when we delicately explain the difference between the two the next sentence we inevitably hear is “Well nobody told me that when taking out my insurance”.
It is important to understand that the Buildings Sum Insured is a subjective measure as it is the estimated cost for full ‘buildings’ reinstatement following a total loss scenario. It represents the absolute limit payable by Insurers and must therefore include adequate provision for the full range of cover afforded under the ‘buildings’ section of the specific policy procured. In theory this could cause the valuation to vary slightly from policy to policy depending on the particulars of cover afforded though in practice the final figure will generally be rounded up to override such differences
In addition to the new build itself it must also include all periphery costs associated with reinstatement as will be expanded on below. Whilst potentially fraught with flaws, the only means to establish ‘a’ definitive figure would be to seek competitive tenders for full reinstatement. This is clearly not practical when procuring home cover therefore the figure will inevitably be an estimated one.
The following is an outline of the main criteria that need to be accounted-for when estimating the overall Buildings Sum Insured, bearing in mind that the calculation will be based on a 100% total loss scenario:
- Demolition, Site Clearance & Disposal Off Site €
Provision for demolition and excavation of all remaining structures, segregating all waste/debris and disposal off site in accordance with waste management regulations
- Temporary Works to Stabilise Adjoining Structures €
Provision for supporting/shoring remaining structures that were previously supported by the insured building e.g. mid or end of terrace/semi-detached properties etc.
- Dealing with Hazardous Material €
Provision for proper removal and disposal of hazardous materials incorporated in the construction or use of the property e.g. asbestos, kerosene etc.
- New Build €
Provision for new building (Usually calculated on a cost per m2) plus cost of site structures, external works etc.
This provision must include for reinstating in accordance with current building regulations. The implications of this can be significant depending on age and form of property
Is the property protected/listed? Again, this can have significant implications on the sum insured
- Construction inflation €
In the case of significant/total loss it can take from months up to years for a property to be fully reinstated therefore provision needs to be made for the additional cost of construction inflation from date of loss to completion of works. This is particularly important during periods of strong construction inflation
- Design Team Professional Fees €
Provision for professional fees incurred in reinstating the property. The extent of professional engagement will be dictated by the size, age, nature and extent of property damaged and can involve one or more of the following: Architect, Structural Engineer, Quantity Surveyor, Services Consultant, Conservation Specialist, Preservation Specialist etc.
- Provisions for Planning/Utility Fees & Charges €
Possible utility reconnection/capital contributions
Possible planning application fess & contributions
- VAT on All Above €
@ 13.5% on Construction Work
@ 21% on Professional Fees
@ 0% on Planning fees/charges
TOTAL ROUNDED €
Clearly this calculation is not a task that many policyholders will relish the prospect of figuring without assistance. Thankfully, the Society of Chartered Surveyors Ireland produce, annually, their ‘Guide to House Rebuilding Costs’ for insurance Purposes which can be found on their website www.scsi.ie
As an aside, most of the loss adjusting firms engaged by insurers to handle claims on their behalf use this guide (or a version thereof) as the basis for reviewing the adequacy of sum insured when first dispatched to a new claim. Therefore, it stands the policyholder in good stead to use the same approach, subject to annual review prior to renewal of course.
The guide simplifies the valuation process in respect of “Estate type houses built since the 1960’s” broken down for various configurations and regions throughout Ireland. It is strongly recommended that any policyholder estimating their own Building Sum Insured should study this guide very carefully to fully understand the nature and limitations of same. Only if their property falls within the range covered by the guide should they proceed to use the online calculator which can be found on the same SCSI site.
Where a property falls outside the parameters of the guide e.g. more than two storeys; with basement; one off or period properties; apartment buildings etc. then it is strongly recommended that the Buildings Sum Insured is assessed by a suitably qualified and experienced professional.
Inadequate Building Sums Insured is without doubt the single most frequent issue we encounter on domestic property claims. Policyholders simply do not understand fully what the figure is for; the extent of what it needs to cover; or how to go about calculating same
Obviously the greater the level of underinsurance the greater the impact.
We at Owens McCarthy have however had considerable success in negotiating the sufficiency of sums insured where previously underinsurance was suggested or managing the claim process to minimise its impact where unavoidable.
Martin O’Brien has more than 30 years’ experience in the property/construction/insurance sector. He runs our South-East office and is an integral part of Owens McCarthy’s technical claims team. Martin is a qualified Quantity Surveyor, an Associate of the Society of Chartered Surveyors, and a Member of the Royal Institute of Chartered Surveyors. He holds a Degree in Quantity Surveying and Certified Diploma in Loss Adjusting