Far too many people allow their insurance broker to place an insured value on their properties. But how do you know that this value is right? Will the policy cover the total replacement value of your property? There have been a number of cases where the cover was not adequate which should start alarm bells ringing.
If you are a landlord that owns a number of properties then this is particularly important. A landlord insurance policy must cover all foreseeable risks and it is vital that you disclose everything before cover commences. If there are any changes, such as a longer than anticipated vacant possession then you need to tell your insurers.
What is included in a good Landlord Insurance Policy?
A good landlord insurance policy will cover you for longer vacant possession periods and will also provide protection against third party claims. You never know when a claim could arise such as one of your tenants suffering an injury or even one of their guests. A third party claim can be devastating and can even cost more than the value of your property.
What is the Real Cost of Replacing your Property?
Do not rely on the market value of your property or the price that you paid for it as being the real cost of replacing it if all was lost. Insurance policies work on the “indemnity principle” which means that after a claim is made the claimant should be in the same position financially as they were before the claim. No worse off and no better off.
If your insurance cover is not adequate then you could easily find yourself in a negative situation if your property had to be fully replaced. Prices are rising all the time including building materials, professional fees, site clearances etc.
Let’s say that the real replacement cost of a property is £500,000 but you only have insurance cover for £400,000. You would be under insured by a factor of 20% meaning that you would have to cover this amount when the insurance company paid out the claim.
How to Calculate the Real Cost of Rebuilding
There are two organisations in the UK that you can go to for help when calculating real rebuilding costs. These are the Royal Institution of Charted Surveyors and the Building Cost Information Service (BCIS). On their websites you will find a lot of detailed information about the cost of rebuilding properties.
Additionally there is a useful calculator provided by the Association of British Insurers (ABI) in association with the BCIS which you can find here. You need to be careful if your property is listed, very old, thatched etc as it is not easy to calculate rebuilding costs in a standard way here. In this situation use a chartered building surveyor to provide a professional valuation.
Once your valuation is correct your insurance company should index link annual premiums so that your property insurance is accurate as time progresses. So whether you are a landlord or not it is essential that you use the correct valuation for the rebuilding of your property and not rely on the “best guess” of your insurance broker.