All landlords know the importance of insurance and rely on the protection it provides. When the worst happens and a property in your portfolio is damaged or destroyed, the value of insurance cover becomes starkly clear.
But what happens when that cover is inadequate, and fails to cover the costs needed to get your property repaired and your tenants happy? This is the phenomenon of underinsurance, and it has been estimated by rebuildcostassesment.com that 82% of UK properties were underinsured in some way.
Landlords are especially at risk, with up to 40% of rental properties being underinsured and privately rented homes in Britain being underinsured by a whopping £315 billion. With the cost-of-living crisis only getting worse, landlords profits and budgets being squeezed, how many more rentals are at risk?
Read on to learn about how this can happen, the associated risks, and how to protect your property portfolio.
How underinsurance occurs
Let’s go through some potential causes behind the underinsurance issue:
- Automatic renewal of your policy. This can be a time-saving convenience for a busy landlord, but without considering changes in the economy, property values or your own business, pre-existing cover may become insufficient.
- Improving your property without improving your insurance cover to match.
- Using the market value when submitting quote forms, and failing to account for demolition, site clearance, surveying, local authority fees etc.
- Not accounting for loss of rent. Depending on the extent of the damage, a property will take time to be returned to a usable state. This loss of revenue can be covered with insurance, but landlords must be realistic with how long a damaged property may take to be repaired.
- Insuring a property with regular home insurance, not a specialist landlord policy. This mistake can leave you without liability or loss of rent cover.
Any of the above causes could be applicable to your business, many of which are hard to notice or can be easily forgotten. You may believe some of these issues are innocuous, but the associated risks can have dire consequences.
The risks of underinsurance
When an insurance company receives a claim on an underinsured property, they are not liable to cover the full sum of the repair or rebuilding costs.
In this event, the insurer will invoke the ‘condition of average clause’ of your insurance policy. This lets your insurer pay out less, likely reducing their settlement by the percentage the property is underinsured by.
Depending on the value of your property and the level of damage, you could be left with a bill in the tens of thousands. Putting a business under additional financial stress after disaster has struck puts its survival at risk or could have knock on impacts on the rest of a landlord’s portfolio.
Underinsurance and the cost-of-living crisis
The cost-of-living-crisis has accentuated the problem, putting even more landlords at risk. Increased overheads are pushing landlords to opt for cheaper insurance policies, whilst the costs of repair and rebuilding are only going up.
That short-term saving you achieve at policy renewal will be dwarfed by the costs you will be liable for if your property sustains significant damage.
The generally high inflation in Britain today means that underinsurance can creep up on even the most responsible landlords. To help property owners be vigilant, the Building Cost Information Service’s (BCIS) House Rebuilding Cost Index can be utilised. This provides guidance for a wide range of stakeholders on how much a property may cost to rebuild.
How to avoid underinsurance
Keeping up to date with economic trends using tools like rebuildcostassesment.com and the BCIS’s service is a great way to ensure you stay informed, but what practical steps can be taken to mitigate these risks?
A collaboration between The Association of British Insurers (ABI) and BCIS has created a free to use rebuilding cost calculator. After inputting details like the property type, year of construction and postcode, an estimation on costs is generated. This is a useful tool to get a sense of where your properties are at, and an idea on how you may wish to adjust your policy.
Another method is finding a policy that is index linked. Upon each renewal, these policies increase the sum insured, factoring in changes to associated increases in costs. This is an investment, but one that takes away the need to personally calculate changing costs.
That, however, is still an automated process. All businesses are different, especially with commercial rental properties, so getting some hands-on help from a specialist is best. That is why we at Harborough Portas can offer bespoke advice as we will spend time to truly understand your business, your property portfolio and recommend and find exactly the right cover for you to ensure that underinsurance won’t become an issue for you.
We can connect you to a third-party service, who offer rebuild cost assessments including a low-cost online rebuild cost assessment, or on-site assessments as a premium service. They provide a comprehensive RCA report, considering all the specific circumstances of your business. Many of the UK’s major insurers will remove the Average Clause from your policy if you insure for the amount recommend in an RCA report which is no more than 3 years old.
Give yourself some peace of mind by contacting Harborough Portas for a personalised, one-to-one service with a qualified and experienced director of the business. We’ll be happy to help you avoid the pitfalls of underinsurance and assist with any other insurance needs you may have.
Call our team on 0116 260 0506, email us at mail@harboroughportas.com or contact us via our website.
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