Taking Control of Buildings Underinsurance

Nick Turner, Head of Surveying, Woodgate & Clark urges insurance professionals and loss adjusters to work together to tackle endemic underinsurance.

The endemic problem of buildings underinsurance exacerbated by spiralling material costs and a dearth of skills has been a major concern for property insurers. Almost nine in ten (87%) builders report an increase in material costsi and the on-going recruitment crisis means at least one in three Federation of Master Builders (FMB) members struggle to recruit skilled tradespeopleii, pushing labour costs up. Naturally, the insurance sector cannot control the economy and while much work has been done in recent years, not least by BIBAiii, to help educate commercial policyholders of the risks, perhaps there is a greater role for loss adjusters to play in tackling this problem.

In analysis by RebuildCostASSESSMENT.com, 83% of properties were found to be underinsured in 2022, up from 80% in 2021. On average, these buildings were insured for just 66% of what they should have been, from 68% in 2021. That means a property with a total rebuild value of £340 billion with buildings insurance of only £221 billion is underinsured by £119 billion.

The impact on the policyholder can be huge. Indeed, commercial insurance policies commonly include an average clause or a proportional adjustment clause meaning that an underinsured claimant will receive a settlement that has been lowered in some way.

Loss adjusting and claims management businesses often see policyholders at their lowest, after a major loss or devastation to their home, commercial property or business. Sometimes though, it becomes evident that policyholders have not understood what the ‘sum insured’ is when they took out their policy, or neglected to update the policy after building works. It is never easy witnessing the catastrophic consequences of underinsurance but all too often, mistakes have been made at policy inception or there has been a failure to update their policy following significant changes to the property.

While some may make a genuine attempt to estimate the rebuilding cost, many rely on the purchase price, thinking that is the figure they should insure for. Others seem to focus on the main building, but don’t realise that site clearance costs and fees must be included, along with the costs related to any outbuildings, hard landscaping and so on. Another mistake is to think that the property insured would be replaced with some other form of construction that might be cheaper than rebuilding like for like.

As far as insurance is concerned of course, the risk insurers take on is the existing building and not some other form that might replace it in the future. The rebuilding cost must be for the same footprint and form of construction, unless the policy is specifically written on a modern materials basis.

An accurate sum insured is vital and with the Financial Conduct Authority (FCA) Consumer Duty rules coming into force, insurance providers and brokers will be working even harder to help policyholders understand how they can best assess and protect their property. This includes educating them on what tools and services they can use to do this, like the Building Costs Information Service calculator.

Meanwhile there is a lot of responsibility placed on the loss adjuster too. Although initial inception and renewal of a policy is the time to calculate and review the sum insured, it is often only when there is a claim that the value at risk is considered in detail. It is a key part of the adjuster’s role to advise insurers whether the sum insured is adequate and essential to ensure a fair settlement is reached. Some policies may even have a clause allowing insurers to void the insurance contract if the sum insured is so significantly different to the value at risk that insurers deem the risk to have been misrepresented.

Going further than this, at Woodgate & Clark, we are working with our insurer customers to create a feedback loop of detail on property risks and costs that may help identify and prevent the underinsurance challenge escalating further. Timely, accurate information on building and labour costs along with greater detail on the precise nature and causes of cases of underinsurance could prove highly beneficial to insurers and brokers alike.

The building costs crisis has created challenges for the market but one positive is that it has highlighted the chronic and growing problem of underinsurance in the UK. While it is up to the insurance sector as a whole, including loss adjusters, to help ensure policyholders are educated on the importance of adequate cover, more data and insight on claims with inadequate sums insured could benefit all parties.