Cost not Value: The dangers of being under insured

My work as a property valuer is one where I have to explain quite regularly that the cost of a building is not the same as its value and this is a misconception that many people still do not appreciate.  It is one of the most important factors in having Building Insurance Reinstatement valuations regularly updated.

The route provides 27 miles of privately funded and operated highway from Coleshill in North Warwickshire to Cannock in South Staffordshire.  The road carried an average 47,592 vehicles on weekdays in the summer of 2010  and from my experience of the Toll Road, private cars form the vast majority of the traffic.
The M6 Toll Road was identified as an “M6 Relief Road” to alleviate congestion on the M6, which is something many people feel has not been adequately addressed and, with one way car tolls at peak periods of £5, this is something to be debated elsewhere.
From a property perspective the benefits have probably been more tangible than the traffic improvements.  The southern end of the Toll Road and the ‘T1’ junction close to J4 M6 coincided with some of the latter stage build projects at the Hams Hall National Distribution Park, a 430 acre business park which ranks as one of the best such employment parks in the UK.
Junctions T2 and T3 appear to largely function as commuter gateways for those living to the south and east of Sutton Coldfield from where national motorway access has improved considerably and the effect on house prices has been positive in these areas.
The access to Junctions T4 and T5 at Weeford and Lichfield has given a stimulus to residential and commercial property markets alike with possibly the biggest winner being the 300 acre Fradley Park, where some of the largest distribution buildings in the area have been built with more to come.  We are marketing the new Fradley Prologis Scheme with 70 acres and units to 700,000 sq ft available to be built and which will be on site shortly.
T6 Burntwood, a forgotten part of the West Midlands conurbation 10 years ago for business and for new build residential perhaps, has not quite been “transformed” but certainly “considerably improved”.
T7 & T8 and the Cannock access points to the Toll Road provided the catalyst that has helped to promote the former coal mining town into a first rate employment location.  Significant development of a cross section of employment type accommodation from offices to manufacturing and warehouse operations has bought vitality to Cannock which I think is largely due to the Toll Road passing the town’s doorstep.
For those drivers who still regularly sit stationary on the M6 between junction 8 and 10 bemoaning the state of the traffic and whether the Toll Road has done the job it promised, the tangible benefits are probably in property as much as traffic counts.  The commercial new build and viability of new schemes along the entire length of the Toll Road has been transformed since the road was built.
For the positive effects of the Toll Road you may look little further than the development and opportunity is has created alongside it.

We provide Insurance valuations on a regular basis for clients and this is a service provided in conjunction with our specialist building surveying and project team who are involved every day in building projects and advising on the cost aspects associated with rebuilding.

Surveyors though are not the only profession involved in Reinstatement valuations and we work closely alongside colleagues in the Insurance industry one of whom, Neale Ingram of Ingram Hawkins and Nock, provided me with a few pieces of anecdotal evidence about his experiences of Insurance reinstatement and the view from the Insurance industry. Neale says:-

“A good quality Insurance Broker will always advise their customers on insurance policies which provide cover for the risks associated with the customers business. One question, within the commercial insurance arena, where customers often seek advice from their broker is “How much should I insure my building for?”

This is a question most brokers are not qualified to answer and where the specialist services of a surveyor should be sought.

The surveyor will undertake an appraisal of the building reporting  on the correct reinstatement sum insured for the buildings (including an amount for debris removal and architects fees), details of the construction of the premises and advice on any actions required to comply with current building legislation

This report is then provided by the Insurance Broker to the customers insurer. The key benefits are there is no under insurance on the building and consequently the customer avoids the “Average Condition” being invoked.  Furthermore, full disclosure within the report of the construction of the building, fire security and other useful underwriting information greatly assists the customers duty of disclosure

It is recommended that a revaluation be undertaken every three years and indeed one major insurer will waive the “Average Condition” if a customer does this.

The consequences of under insurance are dire. The following is a real example from Neale again of how under insurance on a building can cause serious financial impact on a company.

“The customer owned large commercial premises in the Midlands. The buildings were insured for £2,000,000. A claim occurred with thieves stealing lead from the roof over a weekend. To make matters worse heavy rains caused further damage. Loss adjusters were appointed and assessed the buildings sum insured. The correct sum insured was calculated at £6,000,000. The customer agreed with the loss adjusters assessment. The customer was under insured by 2/3 rds or 66%.

The total value of the claim amounted to £300,000. Due to the under insurance the Average Condition was invoked by insurers. In effect the condition means that insurers will only pay any claim occurring under the policy in proportion to the under insurance not with standing the sum insured. The customer therefore received £100,000 of the £300,000 loss due to the 2/3 rds under insurance.

The cost of a survey report together with the additional premium for increasing the sum insured would only have been in the region of £5,000”

Neale’s comm
ents and observations give a very good guideline on the necessity of being properly insured and the example given of being underinsured could prove fatal for any business caught unaware.

If you need your Buildings valued for cost reinstatement purposes then please contact me and if you would like to discuss any aspect of Insurance cover and are not advised at present then Neale Ingram would be happy to talk to you on 01384 375555 e mail:-

By Fiona Mellor, Valuation.

If you wish to discuss any aspects of commercial valuation, please contact Fiona on 0121 455 9455 or email .