The phrase “challenging economic times” is one we have all heard many times over the years. Sadly, it has never been more accurate when applied to the outlook for 2023 and 2024. Inflation is adding to the already perfect storm created by Brexit, Covid, the invasion of Ukraine and rising energy costs. The threat of recession, industrial action, the Bank of England’s actions on interest rates, and supply chain issues are all creating ongoing daily pressures for the efficient operation of any business.

In the property and construction sector, the implication of the economic turmoil is impacting on the supply of building materials and labour and increasing the cost of both. Skills shortages within the construction market have seen labour costs rise, due to supply and demand pressures and the loss of EU construction-sector workers. Supply chain woes have led to the cost of materials, such as steel, cement and timber, going through the roof.

The resultant increasing cost to repair and reinstate property inflate the cost of insurance claims. This will add further to the pressures on premium rates. In the insurance sector “hard market” conditions not only trigger the potential for premium rate increases but can also influence the availability and extent of cover required to adequately protect businesses. The services of an experienced insurance broker with sector expertise are essential to secure the ongoing levels of protection at a viable cost. Providing proof of the insurance programmes in place is vital for the property and construction sector to move projects forward, attract finance and ensure on-going protection of the asset to satisfy all stakeholders in the property.

The combination of the above factors means many property insurance valuations are out of date with insufficient sums insured. This creates underinsurance.

The financial consequences of being underinsured only becomes clear in the event of a claim; be it a partial or total loss. And sadly, that is too late. Where underinsurance arises, the claim’s settlement will be reduced by the same percentage as the amount of underinsurance on the policy. The difference between the insurance payment and the actual cost of repairs/ rebuild has the potential to delay the work of reinstatement, require an alternative build solution, or severely impact on the financial position of the business.

Underinsurance can potentially reduce the insurance settlement on loss of rental income too. In addition to the previously mentioned factors, planning applications and processing delays are currently adding considerably to estimated rebuild times. This should prompt a review of your insurance indemnity period for loss of rent.

Instructing a professional valuer to carry out a reinstatement cost assessment and estimate the time it will take to demolish the building, clear the site, gain planning permission and rebuild/refit the property ready for occupation will greatly help to understand this. Should the estimated time exceed the current indemnity period for the insurance coverage for loss of rent, consider extending the indemnity period accordingly. Any shortfall between the expiry of the indemnity period and when rental income has been re-stored to pre-loss levels could be considerable.

Berkeley Insurance Group work closely with our clients to provide comprehensive advice and assistance to secure appropriate and competitive insurance coverage to protect our client’s property and business. Underinsurance features prominently in our regular discussions with our clients. We also work closely with market leading experts on reinstatement cost assessments for property and can offer discounted valuation rates for individual properties or indeed structure a full valuation schedule for an entire portfolio.

The following is a brief overview of what action can be taken to tackle underinsurance. This information is for guidance only. We strongly recommend a detailed discussion and action plan is agreed with your insurance provider that is specific to your own requirements.

i) Establish the source of the current sum insured. If satisfied a professional reinstatement valuation (valid within the last 3 years) has been used as the basis for the sum insured, go to point ii). If no valuation can be traced, go to point iii).

ii) Check if the sum insured has been index linked at each renewal since the valuation. If not, reference should be made to indexing increases and factored into the current sum insured. Next, ensure any costs for alterations, extensions and improvements at the property have been considered since the date of the valuation. Check the position on non-recoverable VAT with your insurer and instruct the Valuer accordingly. Once satisfied, go to point iv)

iii) Instruct a professional valuer to carry out a reinstatement cost assessment on the property. Assuming cover is arranged on a “Day One Reinstatement” basis (this is strongly recommended) inform the valuer that this is the case. The valuation will then NOT require any uplift for inflationary purposes. Request the Valuer to include comment on the time it will take to rebuild the property. Review this against your current indemnity period for loss of rent.

iv) Put in place a diary programme to update the valuation every 3 to 5 years. Negotiate with insurers to include an underinsurance waiver clause (check the terms that will apply to this clause).

v) Always place and maintain buildings insurance on a “Day One Reinstatement” basis with an adequate uplift to be applied to the buildings declared value. The extent of the uplift should be reviewed periodically to ensure it remains adequate by considering inflationary factors on materials and labour. Ensure that adequate index linking is added to the buildings declared value at each renewal.

iv) Remember to update the sum insured to allow for any future alterations, extensions or refurbishments and check index linking is added at all future renewals. Additionally, the impact of any future changes in VAT should be considered.

Berkeley Insurance Group have been a ProCon Patron for many years and we are committed to supporting the membership. In these challenging times, it’s important that Leicestershire businesses work together and support each other.

Alan Percival, Director

• 0116 261 4728
• apercival@berkeleyinsurancegroup.co.uk

Trevor Palmer, Real Estate Account Director

• 0116 261 4747
• trevorpalmer@berkeleyinsurancegroup.co.uk