Underinsurance- 3 Businesses' Experience

We have spoken before about how important it is to ensure you have the correct rebuild value for your building insurance- this will be different to the market value of the business and can be difficult to estimate without getting a surveyor in.

FSB Insurance Service’s free rebuild valuation calculator service is provided by CPA Adjusting, and they offer discounts for full valuation services to members too. They were able to give us three examples of cases they’d encountered where early action could have ensured the business didn’t lose out on their claim.

Small Shopping Centre suffers fire damage

This property owning company had a small shopping centre in their portfolio which suffered a quite serious fire causing damage with a repair cost in excess of £100,000. When the Loss Adjusters assessed the nature and extent of damage it was also identified that the sum insured available was inadequate and only represented around 70% of the total cost of reinstatement of the property.

As is normally the case with commercial insurance, the policy was subject to an underinsurance penalty, usually known as ‘Average’. As a result, the settlement proposal made by the Insurers included a hefty £30,000 reduction from the total cost of the damage.

Hotel buildings insured based on market value rather than rebuild cost

For insurance purposes market value is usually irrelevant, which proved to be a costly error for the limited company developing a new hotel business. The buildings had been acquired and were in the final stages of refurbishment when an electrical fire caused what appeared to be limited damage to the buildings. Unfortunately, what appeared to be superficial at first actually had ramifications that meant the costs involved to complete the project were much higher than expected.

When insuring the premises, the owners had adopted a figure aligned to market value and insured for £1m. When investigated it was found that the full cost of reinstatement to include compliance with current standards and Building Regulations was nearer £4m with due allowance for debris removal costs and professional fees. In this situation the owners were left with funding 75% of the repair costs themselves.

Residential property owner faces subsidence issue

There are many people making a successful business out of property ownership with portfolios of varying sizes. Mr O had such a portfolio including 15 residential properties let to tenants providing a nice steady annual income. When the tenant of one of his properties discovered the presence of cracking, it quickly became apparent that there was a potential subsidence problem. This was found to be caused by the close proximity of trees and vegetation, the roots of which were undermining the ground beneath the foundations, which is a common cause of subsidence damage.

Whilst an insurance policy was in force which included cover against subsidence damage, the owner had relied upon his own knowledge of property when declaring the value instead of seeking professional advice. It was found that the sum insured of £180,000 was inadequate for reinstatement and the true reinstatement value was £315,000. The owner was left to fund over 40% of the ultimate repair costs.

The situation could have easily been avoided had the owner invested in having professional Reinstatement Cost Assessment completed which would have cost less than £500. When a property owner has multiple properties, they can often get a good discount by having the entire portfolio reviewed at once.

The above business owners were unfortunate to suffer a loss whilst underinsured, but FSB Members can get a free valuation indication here, which will give you an idea of whether your sum insured is correct or not. Once you get the indication back, you can decide whether to purchase a valuation based on whether your results are in the red (under or over insured by more than 15%), yellow (under or over insured by less than 15%) or green (roughly the correct value insured) zone.