Block of Flats Insurance and the Underinsurance Danger

As a specialist property insurance broker, Octo Insurance Brokers, feels obliged to warn of the latent danger of underinsurance within blocks of flats insurance policies currently held in the market.  In this article, we are also highlighting how easy it is to get the sums wrong for your blocks of flats insurance. This is regardless of whether you are the freeholder, managing agent or residents' association managing the insurance arrangement on behalf of all leaseholders in the block.

The underinsurance issue within the UK property sector

Octo, which has 25 years’ experience in arranging insurance for a wide variety of properties in the UK market, including block of flats insurance, knows that many types of property, from domestic homes to dental surgeries and sports centres, are currently underinsured. Relying on index-linked sums insured each year is not safe. Blocks of flats are, in this way, no different from many other properties, both residential and commercial.

In fact, experts at Rebuild Cost Assessment estimate that nine out of 10 properties in the UK are wrongly insured, by being either underinsured or overinsured.  76% fall into the underinsurance category and 20% into the overinsured.  The figure does change, according to where in the country you are. 

In Scotland, where Octo Insurance Brokers is headquartered, the fewest percentage of properties are underinsured (72%), whilst in Wales it is 80%.  This is also true in the North East, where Octo has an office base, whilst in the South West, where we also have an office and local presence, 78% of properties are underinsured.

Reasons for property underinsurance

The reasons for property underinsurance often stem from a misunderstanding when it comes to the ‘value’ of the property that needs to be insured.  Often, property owners or managing agents are so tuned in to market value that they assume that the value for the insurance policy is exactly the cost that the property might sell for, if it went up for sale.  

This is a key reason for underinsurance, because when you sell a property, you are not rebuilding it.  Your buildings insurance policy is there to help you recover from an unanticipated event such as flood, fire,  malicious or theft event, or storm damage – situations that might need you to rebuild the property from the ground up.

Additional costs not considered within property market value

If you consider it in these terms, you will start to see where additional costs need to be added in to your rebuild cost.  The obvious costs are labour and materials.  But you will also need to factor in professional services fees charged by experts such as architects, surveyors and lawyers.  You may have to remove rubble and reinstate services to the property that have been damaged.  Planning permission costs may be incurred. If the building is uninhabitable for a time, you have to think about the outlay that would be incurred in sourcing alternative accommodation until repairs are complete.  All of this adds up to a lot of cost.

Calculating the correct Declared Value for your property insurance

It is precisely this roster of additional costs that is overlooked by many people who are arranging their buildings insurance.  The Declared Value that you need to provide for your block of flats, and on which your sum insured will be based, needs to consider all of these additional costs that are not included in the market value of the block.  Calculating what these are is difficult for a layperson.  And, whilst there are some self-help calculators on the market, these typically do not apply to blocks of flats, and any use of standard formulas is very generic.

Blocks of flats are complex in their make-up, have unique aspects to their construction and may have undergone extensive conversion. Some may require specific materials in order to repair or rebuild them.  Should they be a listed property, the costs are augmented by the need to procure specialist materials and craftsmanship for the rebuild.

There also has to be an assessment of what should be covered by the freeholder, as the owner of the building’s structure, and what is the responsibility of the leaseholders who are occupying the flats or apartments within. 

All of this then leads to reviews of aspects such as partition walls, cabling and other things that complicate the calculation.  A block of flats insurance policy should also consider communal areas, which are the freeholder’s responsibility.  Then there are fences, garages, car parks, driveways, walls and outbuildings to consider, not to mention underground pipes and cabling and possibly equipment, such as generators or air conditioning systems.

Why block of flats owners should get an expert’s help

Getting the Declared Value figure right for a block of flats insurance policy is challenging, which is why Octo Insurance Brokers always recommends that a policyholder solicit expert help.  This is best delivered by a chartered surveyor who is approved by RICS (the Royal Institution of Chartered Surveyors).  Allowing their trained eye to calculate the figure is essential.  

Another reason to get expert help with all of this is VAT.  Whilst there is no VAT applied if a building has to be completely demolished and rebuilt, there would be VAT if only a partial rebuild was necessary, no matter how close to a total rebuild this was.  This is a very grey area, and it pays to get a broker’s expert help, so that an individual insurer’s approach to VAT inclusion or exclusion within Declared Value is sought.  

From there, if the Declared Value is correct, the sum insured can take care of itself.  The insurer will apply an added amount to the Declared Value, factoring in the impacts of inflation, and then base the premium on the resulting sum insured figure.

The dangers of underinsuring a block of flats

If the Declared Value is not correct and underinsurance exists for your block of flats, it is a dangerous position in which to be.  If you underestimate your Declared Value, whether intentionally or not, any future claim could have ‘average’ applied, which reduces the settlement (see below) as the very time you do not need the added worry.

The trouble for many properties in the UK is that the degree of underinsurance is considerable.  On average, they are insured to just 63% of the amount that they should be, and there are again regional variations with this.  The figures are typically way beyond the wriggle room that an insurer might allow.

How insurers deal with property underinsurance

This then leads block of flats freeholders, managing agents or resident associations into dangerous territory, should a claim, of any size, be made.  If an insurer calculates underinsurance on the policy, they will often apply what is called ‘average’ to any claim that is presented.  If, for instance, the property should have been insured for £2 million, but is only insured for £1,260,000 (63% of the required rebuild cost), any claim, partial or full, would usually be reduced by 37% (the degree of underinsurance).  In simple terms, the insurer treats it as if you were self-insuring for the underinsurance element.

So, should your block of flats require a total rebuild, instead of getting the £2 million you require, you would only receive £1,260,000.  Similarly, if storm damage inflicted £60,000 of damage, you would also receive far less in settlement – just £37,800. The shortfall would be your own responsibility, because you had not insured the property for the right amount.

Consider also that your alternative accommodation cover will also be too low.  The alternative accommodation limit is usually a percentage of your building sum insured.  So, if your building sum insured is not adequate, then it stands to reason that your alternative accommodation will be impacted too.

Summary: How to accurately calculate the Declared Value for your property insurance policy

The key to getting this right is to not guesstimate what the Declared Value should be and not to rely on any former valuation that you inherit from a previous owner or manager of your block of flats.  Index linking helps, but it is not specific to your building.

Always gain verification and an expert chartered surveyor’s view.  Make sure you re-evaluate your Declared Value on a regular basis, if not through a site visit, at least via a desktop valuation.  Octo can help here too, as it has partnered with a desktop valuation service and, in many circumstances (rebuild value dependent) it is a good and very cost-effective way to give you peace of mind. For just £200, that’s what you could achieve.

Approach a broker, like Octo Insurance Brokers, who can put you in touch with the right people to help and then make sure you use their advice to get the right property insurance policy in place, for your specific, tailored needs. One size does not fit all, as Octo always maintains, so do not be caught out by policy terms and conditions that jeopardise your protection or fail to factor in your block of flats’ unique circumstances.  If you are going to pay a premium, make sure that premium is not wasted through under insurance or inadequate cover.

Call us today, on 020 4576 4092, to discuss your block of flats insurance or apartment insurance requirements.

Author credit: This Octo insurance article has been produced by Richard Davis, a property insurance broking specialist with over 40 years’ experience in the Scottish insurance and UK insurance markets.