Why has there been a surge in complaints against building insurance products?

According to The Financial Ombudsman Service (FOS) building insurance complaints are on the rise. Their figures show there were 6,497, in total, in the last financial year (2022-23) – an increase of over a quarter, compared to the year before where complaints reached 5,101. The FOS says the increase in figures is due to a rise in disputes about declined claims and claim values.  

One of the most common complaints they receive is that ‘the insurer offered customer money but it wasn’t enough to complete the repairs or replace what was damaged’. Also known as ‘underinsurance’ – this occurs when when the insurance cover or sum insured (the maximum amount of money that the insurer is obliged to pay in the event of a claim), is less than the value at risk.​  

Underinsurance can leave customers substantially out of pocket if they ever need to make a claim. For example, if an insured customer makes a claim of £40,000 on a property insured for £400,000 but its current valuation is £500,000, it’s likely that the insurer will proportionally reduce the claim amount to £32,000​.  

Although brokers and insurance agents have little control over the final information their clients provide, they do have a duty to ask enough clear and specific questions to correctly represent the sum insured. And with 33% of complaints upheld by the FOS last year, it’s integral to preserving a business’ reputation.  

But what are the reasons behind the rise in underinsurance? And, of equal importance, what can the industry do to help their clients mitigate this risk?  

Not all contracts have an index linking clause that factors in super inflation 

From the pandemic, and subsequent lockdowns to the war in Ukraine, a series of unforeseen events have seen inflation rocket to extremely high levels across the globe.  Although it’s rises in the Consumer Price Index (CPI) that tend to hit the headlines, indexes show that inflation has had an even more adverse impact on the construction industry. Reduced productivity, material shortages and increased contractors’ preliminaries have all contributed to peaks in materials indexes. In 2022, reinforcement (concrete) peaked at 86%, while softwood carcassing and structural members peaked at 42%.  

These increases have all contributed to an increase in house rebuilding costs – since January 2020, the BCIS/ABI House Rebuilding Cost Index (HRCI) has gone up by 37%, ​ peaking at just under 20% (year on year increase) at the end of 2022.  

Although the majority of contracts use index linking to adjust for inflation, it’s important to check that your clients’ contracts are linked to an appropriate index, which will give a more accurate indication of house rebuilding costs. Ideally, the index should be applied regularly (preferably monthly) during the process of the insurance. There should also be provision for index linking to continue after the loss has occurred, during the assessment and throughout the subsequent rebuild period.    

An index that measures house rebuilding costs will offer your clients the best protection against inflation. But it’s important to inform them it’s not a replacement for an assessment that’s carried out by a trained professional.

Many online calculators don’t give an exact sum of insurance, as they often omit important variations and building regulations

There are around 25 million home insurance policies in the UK and more than half (52%) of these were bought online, using calculations provided by an online calculator.  Although these vary in accuracy and reliability, many of them tend to rely on a market value of a property and omit important information.   

This could include several regional and national variations that take locality and regulations into account. For example, the cost of materials will vary according to the distances that the components travel – therefore, a rebuild in the Highlands of Scotland could be more expensive than a rebuild in Edinburgh, due to the longer distance in delivering components.  

Building regulations also need to be taken into consideration. In June 2022, changes to Part L and F together with all-new regulations Part O and S came into effect, which added an adjustment of 5.7% to the HRCI.  ​It’s important to advise your clients to use a rebuild tool that accounts for variations in regulations and standards that will provide a more accurate assessment.  

Assessments might not contain essential or up-to-date information

It’s easy to let an insurance document languish in a drawer but they require regular evaluation to ensure they’re as up to date as possible. An initial assessment should be carried out by a surveyor using a First Principles basis that gathers as much accurate knowledge as possible, regarding the property and the availability of plant, labour and materials needed in the event of a claim.  

In addition to a professional assessment, advise your client to review it annually, to ensure it reflects any subsequent alterations and improvements they’ve made to a property. ​ These include any extensions, conversions or enhancements to fixtures and fittings. Sustainable technology, such as solar panels, should also be included in this.  

Ensure that the clauses in the policy provide adequate cover for your client

Combined buildings and content insurance products are often the most popular products as they tend to be cheaper and more convenient. The majority of your clients will expect building insurance to cover the worst-case scenario, i.e.: a​ complete rebuild of the structure​.  

It’s important to ensure your client has understood what is and isn’t included within the policy. Cover should be for complete rebuilding of all structures, fixtures and fittings, as well as outbuildings – for example, garages, offices, boundary walls and fences. However, are there additional structures they need cover for (for example, a swimming pool) that the policy has omitted?  

Ensure that your client has checked the small print within the contract’s extensions of cover and exclusions. Extensions of cover could include underground pipes and cables or sewage pipes or breakage to doors, windows or skylights. Also check if they’re aware of exclusions, such as the removal and disposal of contaminated waste or other hazardous materials, as well as liability for damages or injuries to third parties. 

Give guidance on the complexities linked to older properties or listed buildings

Incorrectly assessing the age and/or quality of a building or property is another common mistake that consumers can make. Ensure that you’ve properly assessed the profile of your client’s property. Period features such as timber panelling, ornate brick and plasterwork ​can increase costs as – in the event of a rebuild – materials that most closely match the original are required. Ensure that they’re also made aware of Listed Building Consent on all building works and the requirement for exact reinstatement, as well as any Article 4 Directions, which restrict work on conservation areas or sites with a high heritage value. 

Conclusion

Building insurance should cover the worst-case scenario – i.e., the rebuilding of all structures.  Both the insured and their advisors have a shared responsibility to get the sum insured right. But to mitigate the risk of complaints against your business, it’s important to truly understand the profile of your client by asking clear and specific questions, as well as offering guidance on the points above.  

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