‘There’s no next time to get it right’ – Zoe Davenport from BCH discusses how to mitigate the risk of underinsurance

Not surprisingly, underinsurance was high on the agenda at this year’s BIBA conference. But what’s behind the dramatic rise in figures and what can the industry do to mitigate its risk? BCIS talks to Head of Marketing at Barrett Corp & Harrington (BCH), and former quantity surveyor, Zoe Davenport for her verdict.

Making a statement

In over ten years of assessing reinstatement values for commercial and residential properties for BCH, Zoe Davenport has encountered some unexpected queries – one that stands out was a client who asked if claims that their house was haunted would push up their premiums. Ghosts aside, what could be considered truly terrifying is the staggering rise in underinsurance in the industry over the last few years. Last year, BCH, the UKs leading provider of Reinstatement Valuations, found underinsurance in 67% of the cases it reviewed for reinstatement in 2023.

These large numbers can be explained, in part, by the significant increase in construction and labour costs over the last five years – as we’ve highlighted previously, 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%.

It’s cases in the residential sector that tend to hit the headlines, with the emphasis on families whose policies don’t provide adequate cover for the sum required to reinstate their destroyed home. And as more pictures of the wreckage of model Cara Delevingne’s LA mansion continue to surface, one wonders if the same predicament could befall her too.

But as Zoe reiterates, the significant increase in costs hasn’t only affected the residential sector. ‘the cost of bricks and mortar are the same across the board. Whether you’re building a library, shopping centre or a home, no sector is immune from the price rises that have contributed to the substantial increase in reinstatement values.’

Devil in the detail

Some of the more unusual places Zoe has assessed include churches and football grounds, and earlier on in her career she received training at the V&A. These experiences taught her that a broad brushstroke approach won’t work for such unique buildings, where the devil is always in the detail – not least in accounting for their numerous quirks and the complications that can arise as a result.

As Zoe explains: ‘In the event of a fire in one of the chapels we were assessing, we needed to take into account exhuming and relocating the bodies. On top of the cost of materials this meant counting all the stones on the floor to calculate the rate per relocation of remains.’ Using the stark example of reinstating the V&A, the historic artefacts that need evaluating are, unsurprisingly, endless – hand-painted silk wallpaper and hand crafted ceiling details and plastering, to name but a few.

It’s these sorts of elements and features that can complicate calculating reinstatement values for historic, listed buildings or buildings or architectural significance.

Zoe says: ‘The appointment of highly sought after artisan skills such as masonry or dry-stone walling might cause delays to the reinstatement, which could drive up the costs further. In addition, there will always be variations between different levels of skilled labour – for example, manual handling and electrician fees.’

These sorts of considerations won’t apply to all commercial or residential buildings. But the omission of important information or unreported changes to a building are still relevant in terms of how they can significantly impact the outcome of a potential claim. Indeed, recent statistics from Aviva’s Broker Barometer survey reveal that 73% of brokers are concerned their commercial clients are underinsured.

Even with the best intentions from all parties, it often takes brokers instigating, what Zoe describes as, ‘difficult conversations’ to make sure the insured has access to the correct, appropriate and adequate amount of information. For example, some buildings might need two separate policies, such as an Amazon warehouse, where the fit-out is the tenants’ responsibility and the landlord has a separate policy that covers the external envelope of the building.

There’s no next time to get it right

‘Insurance is often seen as a grudge purchase but it’s one of the most important purchases we (BCH) think you can make– and probably the cheapest cover for the biggest asset you own, an asset which in many cases still has outstanding finance against it. It’s so important to get that cover right, and the first step is an accurate Declared Value.’ 

At its simplest, ‘getting it right ‘means ensuring from day one of the policy beginning, that the Declared Value will replace the building and all its material facets on a like-for-like basis on the day one of the policy term. So why has a process that sounds relatively simple become so complex and rife with complications?

Zoe explains: ‘There’s actually nothing new about underinsurance. It’s always been an issue in the industry but in the days when prices were relatively stable, insurers could afford to swallow up the surplus of minimal inflationary increases and it could be argued they were able to carry out a softer approach to claims settlement. We’re in a harder market now, where there’s far less financial wriggle room to accommodate inaccuracies within the sums insured.’

This has led to higher instances of proportional settlement in the industry. For example, if a building were insured for £500,000, experienced a partial loss costing £250,000 to reinstate, but the buildings total Reinstatement Value was deemed to be £1,000,000, as the building was underinsured by 50%, the insurer may apply a proportional settlement of 50% to the claim. The total they might contribute to the loss could be £125,000, leaving the policyholder with a £125,000 shortfall.

And even with the right policy in place from day one, customers may remain reluctant to update or review their buildings or contents sum insured on an annual basis. Data from Aviva’s commercial underwriting wing shows that 40% of these customers hadn’t reviewed in over four years, with just one in four of brokers’ clients regularly using a survey to arrive at their sums insured values.

The cheapest cover for their dearest asset

Zoe says: ‘It’s very important that brokers educate their clients. But even then, I think there can be a misconception (from the clients’ point of view) that Reinstatement Valuations are perceived as premium increasing exercises. And that simply isn’t the case.’

She adds: ‘From our perspective, we continue to reiterate just how important it is for brokers to keep the line of communication going and encourage their clients to annually update or check their policy. Because pound per thousand it could well be the cheapest cover they’re buying for the largest asset they’ll own’.

Although every property needs to be assessed individually, Zoe suggests that brokers use this formula to determine whether or not their existing Declared Value is suitable, particularly when it comes to customers with a larger portfolio.

• Do you know the origin of the number of your sum insured?
• Is it within 3 years old?
• Has it been reviewed and renewed annually?
• Has the initial assessment been carried out by a RICS- regulated, unbiased third party or surveyor?

If a client can answer an assured/definitive ‘yes’ to all these questions, the broker has highlighted the main, fundamental components that form the basis of an accurate reinstatement value.

Though online tools such as the BCIS reinstatement calculator can give an indication of the accuracy of a current Declared Value, Zoe always promoted the use of an independent, regulated, specialist Reinstatement Valuation provider with sufficient PI.

Zoe has also seen an increase in cases of where residential homes that were covered by a blanket cover policy limit of £1 million, are now underinsured due to compound rise in construction costs and need specified Declared Values to reflect that a maximum cover limit of £1m may no longer be fit for purpose.

Immaterial world

An initial valuation should always factor in any existing structures, fittings and externals. The same goes for any buildings that contain sustainable features, such as an office that includes solar voltaic panels on the roof or a building that’s been retrofitted. However, although each building must be valued on a like-for-like-basis, there are circumstances where certain materials are no longer compliant, due to technological innovation or building regulations that include Part L.

Zoe says: ‘Anything that’s been superseded doesn’t get to go back. For example, we wouldn’t replace cladding that’s non-compliant, or reinstate kitchens with materials from 60 years ago, just because the original kitchen are that old.’ She also cites an example of remote homes with oil tanks that would likely be replaced with ground source heat pumps or equivalent instead.

She adds: ‘The same principle stands for Grade II listed buildings. Many of the original staircases are considered too narrow or steep, so they wouldn’t be permissible now.’ However, this doesn’t permit any shortcuts with these types of buildings and ‘as a custodian of a listed building’, Historic England will expect the owner to replace specific features that are as close to the original as possible.

Conclusion

Building insurance cover should always be based on a declared value calculated on a total loss basis – i.e., the rebuilding of all structures. Both the insured and their advisors have a shared responsibility to get the sum insured right. But the importance of brokers ensuring they do all they can to calculate the correct sum cannot be underestimated – not least with the introduction of last year’s Consumer Duty Act (brought in and overseen by the Financial Conduct Authority (FCA), which puts more of an onus on the insurance industry equipping their clients with enough adequate information.

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