Property owners are being caught out by the ‘condition of average’ clause.
Increasingly, insurers are enforcing relatively unknown ‘average’ clauses within policies and property owners are finding their insurance claims are being reduced.
For example, if fire damages a property causing repairs costing £100,000 - and the building’s total declared reinstatement insurance value is £1 million - most owners assume they have more than adequate cover.
However, if the insurer can establish the actual cost to rebuild property is £1.2 million they can potentially claim there is inadequate cover in place and reduce the claim via a ‘condition of average’ clause. The claim will be reduced by the same proportion as the amount of ‘under’ insurance.
Ryden has seen a number of landlords exposed in this way. Reductions in the payout of claims can be as much as 50% which is devastating to a property owner. This typically occurs when the Reinstatement Insurance Assessment for a building is out of date or has relied on historic data.
Owners often consider the cost of regularly updating their building insurance as an unnecessary expense. Annual ‘indexed’ updates may seem to be a convenient and cheap way to maintain cover, but this often results in either over-insurance, and therefore unnecessary premium costs, or insufficient cover and exposure to huge risk.
The good news for landlords is that the surveyor’s fees for preparing a Reinstatement Cost Assessment (RCA) can often be recovered through the lease.
The cost for preparing an RCA will depend on the size and complexity of the building but is minimal in comparison to the cost and risk of being underinsured.
Construction costs have fluctuated significantly over recent years so an annual reappraisal is vital. RICS guidelines advise that a full assessment - from first principles - should be undertaken in every third year.
If it has been more than two years since your building was last inspected for an insurance RCA speak to one of our Chartered Building Surveyors for advice.