The Importance of reviewing Sums Insured and Rebuilding Costs in a rapidly changing market
by Roger Van Praet, DipCII, FUW Insurance Services Ltd Non-Executive Director
Insurance is an essential business component, transferring risk and providing much-needed financial security. However, for insurance to fulfil its objectives, the cover you purchase needs to accurately reflect your business requirements. Insuring assets and buildings for incorrect values, or setting cover limits too low, is likely to result in underinsurance.
Underinsurance can lead to policies not operating as intended, delivering less indemnity than needed following a loss, and jeopardising your farm business’s ability to recover. Despite its serious consequences, underinsurance remains common. Recent research by Zurich suggests that underinsurance was a feature in 79% of cases.
Underinsurance is a perennial problem within the agricultural sector in particular. It is difficult to understand why the issue seems to have such a low profile when it poses such a threat to your business survival and its on-going success.
Underinsurance occurs when cover is set too low to adequately meet a policyholder’s needs. Below are some examples that demonstrate how underinsurance can affect different types of insurance cover:
|Declared Farm Buildings reinstatement value on Policy Schedule
|Actual Farm Buildings reinstatement value at risk
|Indicative Cost of repairs following an insured loss
|Claim settlement by insurer
|Financial shortfall for policyholder
|Estimated by policyholder at inception of cover and declared as buildings Sum Insured
|True reinstatement cost assessed by expert opinion at time of loss based on current rebuilding costs and including site clearance, debris removal, planning, constraints and other factors
|Policyholder suffer significant Storm and Tempest damage on buildings. Estimated repair costs are £30,000
|Underinsurance ‘Condition of Average’ applies. The final settlement is proportionally reduced to ½ of the claim value
|Policyholder is left short of ½ of the funds needed to complete repairs with significant financial impact on business
Ensuring sums insured are accurate will mean claims run more smoothly and achieve the best outcomes for customers.
Many factors determine the true rebuilding costs of farm buildings. The current serious labour shortages and materials supply issues due to Brexit, the Pandemic, HS2, shortage of drivers and general demand presents new challenges.
- There is significant inflation on materials – farm buildings are generally ‘materials intensive’ with around 9% increase in general building costs but a massive 30% increase in ‘modern material’ type farm building
- Longer lead and repair times – due to demand for building services, delays in materials and labour issues. HS2 offers no advantage to us in Wales but as one of the largest infrastructure projects in the UK for decades, demand for materials, particularly steel and concrete have increased significantly
- Prices quoted by Agricultural Engineers are only guaranteed for very short periods – often 7 days or even less
Buildings – it’s not just the building itself
A ‘building’ applies not just to a main structure, but also includes features such as foundations, boundary walls, drains, landscaping. Not including such features is a frequent source of underinsurance. Precisely what is included will be defined in your policy wording.
Buildings – don’t use market value
A building’s market value is irrelevant for insurance purposes, and its use for building sums insured is a frequent source of underinsurance. Buildings sums insured need to reflect the full cost of reinstating a building following a total loss. Other factors to consider in determining appropriate Rebuilding Costs/Sums Insured:
- Building Regulation
- Planning requiremen
- Derbis remova
- Professional fees – architects/surveyor
- Welfare – of workforc
- Power and lighting
- Availability of Steel frame/other supplies
- VAT Status (VAT status of owner? Most farms are VAT registered, but not all e.g. retired, charitable status
- Asbestos? Cost of removal and disposal of asbestos is significant location (e.g. Remote, poor access, materials uncommon for location
Basis of Settlement:
Reinstatement is always the preferred outcome. That is rebuilding or repairing to a condition equivalent but not better or more extensive than before. Insurers will usually agree to reinstatement on another site at the same cost if the damaged building is beyond repair and inconveniently located for current farming practices.
Some insurers will offer settlement on the basis of ‘Modern Materials’ which is cover based on the use of modern materials and techniques to reduce costs. Substantial repairs of traditional buildings will be undertaken with modern materials. This can often appear attractive at the time of proposal as rebuilding costs of traditional stone/brick and slate buildings with modern materials is significantly less and consequently premiums are less. However, Modern Materials wording cannot always be relied upon.
What happens when the insured has to reinstate with traditional materials?
- National Park/Conservation Area. Significant parts of Wales are either in National Parks, Areas of Outstanding Natural Beauty, Conservation Areas, SSIs and other areas with significant planning constraint
- Listed Status. Buildings may be listed – on occasions without the insured’s knowledg
- Buildings with development potentia
- When insured simply wishes to put back what was there
Each building will have features that can significantly alter a reinstatement cost, such as difficult site access, period features or specialist construction techniques. A qualified surveyor will have the expertise to identify and quantify these factors, and one should consider appointing a surveyor when establishing rebuilding costs/sums insured for insurance purposes of traditional or specialist buildings.
Stock in Trade, Feedstuffs, Plant and machinery and other equipment
Plant and machinery are commonly insured on either a reinstatement or indemnity basis. These items can be particularly susceptible to depreciation, so it is particularly important to approach valuations from the correct basis. Where the items are still readily available, determining values should be relatively simple. However, for older or difficult-to-source items, you may need to base valuations on alternatives of a similar type, capacity and utility. If dealing with large, specialist or bespoke pieces, there are likely to be a variety of additional considerations, such as costs for design, manufacture, installation and commissioning.
And do not forget your livestock. Prices have been fairly buoyant recently and should be reflected in your overall Sums Insured. Again, Sum Insured should reflect the overall value at risk. Cattle and Sheep can be specified separately if differing levels of cover are required. Insurers’ margins on livestock claims tend to minimal and they will almost always look for Statement of Value at risk before settling a livestock claim
Regular reviews are essential. Your FUWIS Account Executive will always welcome the opportunity to discuss and review your insurance requirements. Contact them today!