Why it is vital to ensure your property sums insured are accurate
A perfect storm of inflationary pressures in the construction industry mean that the majority of businesses’ property risks are currently underinsured. This can have disastrous consequences for any business suffering a major property damage claim, as their insurance will not fully cover the loss, threatening their ongoing viability.
Why are so many businesses underinsured?
Property underinsurance has been an issue for years as many property owners have never had a professional rebuild cost assessment carried out. Instead, they have relied on guesswork to arrive at a rebuild figure, and this inaccurate sum insured has then been carried across from year to year as the basis for their insurance renewal.
This historical inaccuracy has been exacerbated recently by the unprecedented inflationary pressures currently at work in the construction sector:
Supply chain and labour issues caused by Brexit
The UK’s exit from the European Union has meant increased red tape for importing building materials, and a reduction in the available skilled construction workforce. Both of these factors drive higher costs and delays in building works.
Impact of Covid
The Covid lockdown suppressed construction activity and slowed investment in construction projects. As we have emerged from the pandemic, projects which had been put on hold have been restarted, resulting in a surge in demand. This surge has put even greater strain on fragile supply chains.
Logistical challenges
The haulage industry has been severely impacted by both Brexit and Covid, which together have caused an acute shortage of drivers. This shortage has in turn impacted the cost and speed at which construction materials can be delivered.
Ukraine conflict
Construction Industry groups such as the Construction Leadership Council (CLC) are warning that Russia's invasion of Ukraine will lead to further disruption to supply chains, which could lead to price hikes for a number of building materials such as timber. See the CLC’s Construction Product Availability Statement of 8th March 2022
Energy prices
Since the invasion of Ukraine, average energy bills have risen by an estimated 54%, and this cost increase will flow through to energy intensive building materials manufacturing industries such as concrete, steel, and cement, as well as further inflating transport costs.
As a result of these factors, the latest data from insurance valuation providers RebuildCostAssssment.com reveals a massive shortfall in cover among UK properties, estimating that buildings occupied by businesses in Britain are underinsured by a whopping £375 billion - on average, buildings are covered for just 66% of the amount they should be.
Why does Underinsurance matter?
The “Average Clause” included in many property damage insurance policies means that claims payments are reduced proportionately to the level of underinsurance.
A simple example of how this might affect a property claim - let’s say a property is insured for £1,000,000, but the actual cost to rebuild should be £2,000,000. Any insurance claim made for the property could be reduced by 50%. So in this example the insured would need to pay £250,000 towards the cost of rebuilding their property following a major £500,000 incident, such as a fire.
The dangers of underestimating the Period of Indemnity for Business Interruption Insurance
Business Interruption insurance is a vital cover which protects businesses from the loss of income that results from a material damage claim – essentially keeping them solvent while their property is reinstated.
Underinsurance has become such an issue for Business Interruption insurers that some have reintroduced the Average Clause for this cover – for example, Allianz reinstated Average on the Business Interruption section of their “Complete Business” product range in December 2021.
The key elements which determine the level of Business Interruption cover are the estimated Loss of Profit (turnover less purchases), and the Indemnity Period – the time which it takes for the business to return to normal trading.
The factors discussed above affecting the construction trade not only impact the rebuild cost, but they also have a significant impact on the time taken to reinstate the property. It’s vital to keep this in mind when deciding on the Indemnity Period to be covered, as getting this wrong can mean running out of funds before the business is back to trading.
GRP recommends a minimum 24 month indemnity period – but some factors can increase this, for example, if a building is listed (therefore requiring specialist skills and materials to reinstate) or machinery is needed which has long lead-in times for replacement.
How to ensure you have the right level of cover
The best way to ensure that you have adequate sums insured is to liaise closely with your insurance broker and have a professional rebuild cost assessment carried out. GRP work with partner Rebuild Cost Assessment who can provide desk based assessments or site visit at a competitive price.