You’re bound to come across a ‘reinstatement valuation’ for the ‘declared value’ within the insurance policy for a property at some point.
Unfortunately, these are often ignored or glazed-over with catastrophic consequences of potential under insurance and payouts if incorrect.
Knowing what is a reinstatement valuation or rebuild cost assessment and its meaning is therefore critical.
And from a property management perspective, you often get caught in the middle of the issue.
Insurers and brokers may be coming out with information and requests on one side, and owners or occupiers forking the bill on the other.
Therefore, here are seven key pointers to not only understand what these cover but how to effectively apply then to whatever residential or commercial property interest you’re involved with:
1. How to Define a Reinstatement Valuation for Property Insurance Cover
In simple terms, it is the cost of needing to rebuild the whole property from scratch.
It would help if you looked at a worst-case scenario of, say, a fire destroying property from an insurers perspective.
Therefore, a pay-out will need to cover the old debris being removed and the new property being built literally brick by brick, back to what it used to look like before the fire incident.
2. Why it isn’t the ‘Market Value’
This is the biggest mistake often seen – assuming the ‘reinstatement valuation’ is the same as the market valuation’.
The market value is what the property interest is worth to a new buyer looking to use or invest in it.
The reinstatement valuation looks at the actual rebuild cost and often higher than the market value, which will seem strange at first.
So, in effect, it would cost more money to physically rebuild a property than it would be to sell it to someone else.
3. How to Get the Sum Insured
Once you have the Reinstatement Valuation in place, this is called the Declared Value of the property – namely, what it will cost the insurers for a total-loss claim to reconstruct the building.
However, an actual higher Sum Insured Cost is then used in the insurance policy as the all-in final liability.
This is usually around 15 to 50% higher than the Declared Value to include an ‘Inflation Provision.’
This is a final buffer to allow for any increased costs over the next period of cover.
4. Who’s Involved with a Reinstatement Valuation
To appreciate how important this insurance rebuild cost assessment is, it’s worth considering who is interested in this.
The insurance company, and broker arranging cover, is, of course, the main people interested. If the figure is too low and underinsured, then they often resort to the Average Clause in the policy that says they will only make a partial pay-out reflecting this difference.
Therefore, if the trust cost of rebuilding the property is £100,000, but the policy only states £50,000, the insurers may well insist on only paying half the costs. This leaves the owner or other parties to pay for the rest from their own pocket.
However, if it’s the other way round and any the current cover is too high at £200,000 compared to the true cost of £1000,000, you will be paying too much annual premium to cover this.
You may also have a lease on the property, particularly with commercial buildings. The landlord has covenanted to have sufficient insurance cover and the tenant to comply with and pay premiums. You’re then into a world of lease breaches and the other party taking action if this essential insurance Sum Insured is correct.
Plus, don’t forget any mortgage lender or funder who often needs to know what this figure is and the consequences of getting this wrong.
5. Where Does the Current Figure Come From
Presuming the building, of course, is covered by someone at the moment, you need to find out what the current declared reinstatement value is for the property but when this was last assessed and by whom.
It may be on an existing insurance policy or maybe through a mortgage offer and valuation; however, being careful that these are the correct reinstatement and not market valuations.
The sad thing is that, in reality, you don’t know. And there lies the problem.
People have probably made assumptions that it was recently done a few years ago.
In terms of how to establish a new one going forwards, ideally, this needs to be through a qualified RICS building surveyor in tandem with the Building Cost Information Service through the Association of British Insurers (ABI).
It’s basically using standard online tools for construction costs but making that special assessment of a particular property and set of circumstances.
The other advantage of such an extensive external valuation is that you can always rely upon these professional assessments and even their own insurance cover if disputed with building insurers in any future claim.
However, there are other lessor alternatives also to consider.
The first is what they call a desktop valuation, which is simpler and cheaper. Through insurance brokers, they do a calculation based on standard figures without even inspecting the property more for £100 than £500.
Okay, it’s better than nothing, but be careful in terms of it correctly accounting for everything and still being applicable for different insurers and brokers in the future.
The second is just a general uplift on last year’s value, often index-linked to standard building cost increases.
Definitely the crudest and most approximate way of assessing this. Because it is often completed by the insurers at least year-on-year, then this is where people can mistakenly assume a full re-valuation is therefore not needed.
6. How to Complete a Rebuild Cost
The principle of these is simple – to assess the actual cost of having to rebuild the property.
Therefore this tends to look at what they call the day-one reinstatement basis, which is basically rebuilding the same building like-for-like.
However, watch out for any other basis being stated, for example, an indemnity basis which allows for wear and tear.
However, in reality, it needs to cover the reality of each property rather than just a blanket-figure approach.
So, even before you start re-building, it needs to include the cost of demolishing the current building and removing everything on site, followed by all the professional and consent costs with, say, the Local Authority.
Even the following construction cost may have unique aspects like a listed property, adjacent party walls and boundaries, or more expensive stone than brick material. Plus, material and labour costs can vary even regionally, not to mention practical issues like accessibility and new services like drainage.
7. Adding Further Adjustments
As you look at what final tweaks and adjustments are made to the reinstatement valuation, the main one is VAT.
Inclusion of this depends upon the status of the insured party and actual property status. With 20% of the value at stake, you need to be clear on whether the insurers would be expected to pay this grossed-up figure because of not claiming the VAT back on construction materials.
Another big factor is the extent of alterations at a property that now become part of the building's fabric for reinstatement purposes even though they may technically be still the tenant’s, not the landlord’s items.
Also, watch out for new-build properties where the original developer has assumed low figures because of the lower construction costs to themselves to re-build. In contrast, under normal circumstances, they need to increase.
With multi-let properties, you may also need to look at a separate value for communal areas, for example, the external areas of an industrial estate or office park where there is a cost to rebuilding items like walls, lamp posts, and barriers.
8. Applying the Final Figure to Properties
So, you have the new valuation determined, and the insurers shave noted the new Declared Value in the policy. The final part is then knowing how to apply this to the real-life management of properties.
The costs need to be certain for everyone, both the initial valuation fee and increased annual premiums. Check leases to see who needs to pay, and look at appropriate timing of these, ideally at points of renewal.
Make sure you have all the correct new Certificates and policy details and that any global figures for a property have been apportioned between different areas and units.
And of course, make a careful note of when this all needs doing many years again in the future, and any more temporary desk-top or standard insurer-increases every year.
The Importance of Reinstatement Valuations and Rebuild Cost Assessments
These figures are critical for effective building insurance cover, as they dictate what the total cost of any claim could be with them. Get this wrong, and risk being under-insured and only a partial pay-out towards damages.
Therefore, take time to find out what this is and when and how it was correctly established. You can then deal with the consequences, even if this is delayed, and you simply have to alert the insurers and parties to this.
Once completed, then simply correctly document how it has been assessed, diarise it to be reviewed again in the future, and rest assured that the property if suitably covered.
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