Under-Insurance – an area not to be ignored

Under-Insurance – always a tricky area and no one wants to have to deal with the resultant and sometimes disastrous issues of their clients being inadequately insured.

So, how can a commercial or personal property owner know how much it would cost to completely rebuild their property in the event of a disaster?

Deciding upon the level of insurance to buy is important and can be critical. The sum insured must be sufficient to cover the complete rebuild of the property.
Whilst the Insured remains responsible for providing the correct sums insured amount for their property, the Broker and the Insurer must also ask the correct type of questions to assist the Insured in determining the right level for the sum insured….

For example the Insured needs to be asked ‘What is the total value of the property?’ as opposed to ‘How much do you want to insure for?’

Other questions should also be asked that make it absolutely clear to the Insured that they need to insure the property for the ‘build it back from scratch’ value – this means the sums insured amount. Furthermore, Insurers and Brokers have a duty to assist the client in determining that value.

The obvious and correct way of doing this is usually to refer the client to a Surveyor, but this can be costly and result in the client merely ‘having a stab’ at the rebuild or replacement costs based on factors such as the property’s market value. This is not necessarily accurate as the market value is usually derived to be the basis of a sale price and can lead to catastrophic circumstances in the event of a loss.

The whole point of insurance is to provide protection and peace of mind in case a disaster occurs. Buying insurance is a starting point; however, the level of cover is a critical factor and brokers and insurers must assist in ensuring the sums insured are correct for the property risk.

It is strongly advisable to seek professional assistance when considering the sums insured for a commercial or personal property. A number of organisations provide a building valuation service, which may involve a site survey for larger or more complex buildings.

Property owners can avoid under insurance by ensuring the sums insured is the rebuilding value and not just the property’s market value. Remember the rebuilding value should also consider the time it takes to rebuild as well as the time involved in seeking any required planning and/or regulatory permissions.

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