Rebuilding Costs: What do they really mean?

Darren Bagnall, from Flat Living Insurance, discusses why your Sum Insured value is important.

Many insurance products for flats and apartments in the UK have evolved over the last twenty years, originally designed by insurers from commercial policies.

Insurance protection has been enhanced over the years, but the risks faced by Residents’ Management Companies (RMCs) and their Property Managing Agents (PMAs) continue to increase due to environmental and governmental changes and a more litigious society. In this article, we aim to help you ensure that your insurance cover extends to the risks you and your RMC may face.

Why you should not rely on index-linking to stay adequately insured.

In some cases, RMCs rely on index-linking to ensure the Sum Insured values for their properties remain adequate. Furthermore, some RMCs that we questioned had not had an insurance valuation for over 10 years.

Index-linking is a monthly adjustment based on the latest percentage change usually from indices produced by the Building Cost Information Service (BCIS), a division of the Royal Institution of Chartered Surveyors.

Premiums are not altered during the period of insurance but are recalculated for the following year by applying the “current” insurance rate to the adjusted Sum Insured. This appears suitable to safeguard your property until you look into it a little further.

So, what does your Sum Insured need to include?

Apart from the obvious cost to rebuild your property to its current condition and repair, your buildings Sum Insured value also needs to cover:

Architects, surveyors and other professional fees – in the event of a complete loss, the services of architects, surveyors and other professionals will be required to ensure the rebuilt property complies with legislation and regulation.
Planning permission – even if your property is currently “in situ”, did you know that if a complete loss occurred, planning approval would need to be sought to comply with latest planning legislation?
Building Regulations– should your building burn to the ground, not only would you require it to be built to the same specification as existing, but it would also have to conform to current local and national Building Regulations.
Greener Homes – does your current insurance valuation include the latest requirements to comply with ‘Greener Homes’ in terms of energy conservation? This is about reducing CO² omissions and building energy performance in terms of solar gains, heating, ventilating, insulation and air tightness. After a complete loss you would be required to comply with current regulations.
Demolition and debris removal costs – these also need to be included in the Sum Insured and costs can be substantial following a large claim.
VAT – The Sum Insured on blocks of flats doesn’t need to include VAT on its rebuild cost. However, it should allow for VAT on the cost of demolition and fees. Did you know that if you suffered a major but partial loss and insurers elected to repair rather than rebuild, then VAT would be applicable to the total repair cost? We would all agree that 20% is quite a chunk of your Sum Insured.
The cost of improvements, fixtures and fittings – One of our main concerns at Flat Living Insurance is the problem of overlooking the value of lessees’ improvements, fixtures and fittings. Most leases require the building Sum Insured to be equal to the full reinstatement cost and to include specific items such as kitchens, bathrooms, fitted furniture and the like contained within individual flats. The quality and cost of these fixtures may vary from flat to flat. With more flat owners choosing to improve rather than move, can you be sure that the value you have placed on your block is adequate, without viewing and valuing all your flat owners’ improvements?

Are you responsible for deciding the Sum Insured for your block when you may not have been inside many of the flats?

Recently we were made aware of a claim for a flat owner who had suffered considerable fire damage in a block that was only 5 years old. Following investigation, it turned out that the flat owner had £50,000 worth of home networking, wiring and cabling installed for his IT, Hi-Fi, speakers and digital equipment which the RMC was unaware of.

This outlines the danger of not having reinstatement costs assessed, with regular updates by a company that specialises in this area.

Remember that insurersleave the responsibility to provide acorrect and current rebuilding cost with the policyholder.