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Building Sums Insured and Index Linking – it’s so important to get this right

Firstly, it is important to note that the Building Sum Insured is not the same as the market value of your property.

The building sum insured is the figure on an insurance policy which covers the property and fixtures/fittings. This figure should be high enough to cover the cost of rebuilding the property from the ground up in the event of a total loss.

This figure should include debris removal as well as professional fees such as builders and architects as well as taking into consideration the current rate of inflation. One also needs to take into account if the property is listed or requires any specialist materials to rebuild on a like for like basis.

In the current climate, we have high inflation and cost of materials is increasing and so inevitably, the cost of rebuilding properties will be significantly higher than previous years.

Insurers try to mitigate this by adding Index Linking to the policies annually which automatically increases the sum insured by a percentage, however this is not guaranteed to keep the Sum Insured at the correct level.

Of course, the best way to obtain an accurate Sum Insured is to have a survey carried out by a qualified surveyor. This can be impractical and unnecessarily expensive each year, although, it should be considered on a periodic basis. As an alternative, one could use the Building Cost Information Service that provides a RICS approved calculator; this can provide a rough estimate using information such as the property’s square footage. Importantly,  it should be noted, is the policyholders responsibility to ensure the Building Sum Insured is adequate

It is estimated that 80% of UK Properties are underinsured. 

For example, a building is insured for £100,000. There is a fire resulting in damage to the building estimated at a cost of £50,000 to repair. When Loss Adjustors review the claim, they discover the rebuild cost of the property is actually £200,000 and this is the limit of cover that should have been in place. As such, the property is underinsured by 50%. The Insurer can then apply their average clause which allows them to only pay out a percentage of the claim. In this case, because the Insured is under insured by 50% and the original claim was £50,000, the Insurer will only pay £25,000.

This will then leave the Insured responsible for finding the rest of the money required to rebuild the property.

There is also a risk of the insurer refusing to pay anything out at all and they will ‘avoid’ the policy and treat it as if it never existed.

To ensure any insured properties are fully insured and to increase the chances of receiving the total payout upon a claim, please review your Sums Insured annually to confirm they are still adequate.

By Debby GallagherCommercial Account Handler


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