Property underinsurance can be a huge headache for landlords. Failure to insure your property adequately could leave you in financial dire straits in the event of a serious loss or a fire or flood in your property.
Current statistics put the rate of underinsurance of UK rental properties at 40 per cent. That could be you.
It is a landlord’s responsibility to ensure that they calculate and declare the full rebuild value of the rental property making sure it is adequately insured for its total rebuild cost this figure should also include reasonable amounts for architects, surveyors and legal fees, debris removal cost and other costs to comply with government or local authority requirements.
Property underinsurance is defined as a property that is insured for less than the total cost to rebuild. In the event of a claim related to an underinsured property, insurers will not pay the full amount of the claim regardless whether it is a total loss or not.
For some landlords underinsurance can be catastrophic, for example, would you be able to find £45,000 of a £100,000 claim? Landlords can avoid instances such as this by understanding how to avoid underinsurance and by taking out specialist landlord insurance.
Why do landlords underinsure their properties?
Often underinsurance is down to simply not understanding or adequately researching the full rebuild cost of the rental property. Additionally, in some instances landlords may think that underinsurance can be used to gain a cheaper premium but the truth is that a small amount of money saved at renewal of a policy could pale into insignificance when compared with a claim that is not adequately covered due to insufficient insurance.
Other reasons for underinsurance include:
- Landlords can often fail to take the total rebuild value into account. Buildings insurance works on rebuild value, rather than market value. Therefore insuring your property for less than the total rebuild value would mean your property is underinsured
- Failure to protect the property with specialist landlord insurance. Unfortunately, some landlords believe that their property can be covered using a standard home insurance policy. However, standard home insurance does not protect the landlord adequately in the event of negligent tenant behaviour, liability cover or damage to the property. It is therefore important that landlords are adequately covered by a landlord specific insurance policy
- Landlords failing to take loss of rent into account. Sometimes it can take a while for a property to return to a liveable, or workable, state after a claim. In this instance loss of rent cover may not be adequate for the extended period of time
- Failing to carry out regular evaluations of the rental property. Multiple factors can influence your property’s rebuild cost, for example adding an extension to the property would increase its rebuild cost. In addition, many landlords fall foul of ‘auto-renew’ policies year after year and do not take into account any changes or enhancements to the property which could influence their insurance policy
What happens if you underinsure your property?
In the event of a claim, if your property is underinsured insurers will not pay the full amount and instead will apply what is known as an ‘average’ to the claim.
A landlord insures their property for £100,000, and later claims for £50,000 following an accidental fire in the property that was caused by the tenant. When the insurers assess the actual rebuild cost of the property the find it to be £200,000. In this instance the landlord has therefore only covered 50 per cent of the actual value of the property (£100,000/£200,000). In this event the insurer applies ‘average’ which means that only 50 per cent of the £50,000 claim would be paid. The landlord is therefore then responsible for picking up the bill for the additional £25,000. A costly mistake.
For this reason it is important that landlords ensure they have declared the full rebuild value (including the costs mentioned earlier) to ensure that their rental property is adequately insured to cover the costs should the worst happen.
How do you avoid underinsurance?
Luckily for landlords there are a number of ways to avoid financial loss in the event of a claim. Top tips for landlords to avoid underinsurance include:
- Making sure that a regular professional property valuation is carried out on the property. It is recommended that this is conducted every five years or if property prices have changed significantly. A valuation should consider all aspects of your property, this includes local and regional housing trends. To gain an indication of your property’s rebuild cost you can use the Association of British Insurers online calculator https://calculator.bcis.co.uk/
- Don’t forget to base your insurance cover on the rebuild cost and not the property’s market value. The value should include not only the main structure of the property but also external areas, including walls, and anything else that is on site. In addition demolition, removal of debris, rebuild and material costs and professional fees should also be included
- Making sure you understand the terminology. Keeping yourself up to date with the latest terminology can help to keep you informed. For example key terminology includes;
- Buildings sum insured: the cost of rebuilding the property if it was completely destroyed including demolition, removal of debris, local authority and professional fees
- Average: if a property is underinsured, in the event of a claim the insurer would proportionally reduce the pay out by the amount that the property is underinsured
- Ensuring that you take out a comprehensive specialist landlord insurance policy that is index linked. A policy that is index linked means that it will increase your buildings sum insured at each renewal by the percentage based on the BCIS House Rebuilding Cost Index; this is incredibly useful when it comes to reducing the likelihood of underinsuring the property
- Avoiding delays when it comes to obtaining adequate insurance and certainly don’t wait until you need to make a claim! Avoid underinsurance on your rental property by securing a comprehensive insurance policy from the start!
Hamilton Fraser Total Landlord Insurance can help you to protect your property from many eventualities. Speak to a member of the team today on 0800 63 43 880.©LandlordZONE® – legal content applies primarily to England and is not a definitive statement of the law, always seek professional advice.