As the construction industry moves along slowly in the midst of the pandemic, it's becoming increasingly clear that property rebuild costs could increase. This means homeowners should re-evaluate their sum insured to make sure they are covered if the worst happens.
Alongside the slowing of commercial and residential construction work over the past few months, the construction industry's supply chain also saw a drop in manufacturing and servicing as companies experienced extended closures and furloughed staff.
The production of many key building materials reduced significantly as a direct result of these closures. At one point in April, it was reported that plasterboard wasn't available anywhere in the UK, and there were similar stories related to bricks, mortar and other items*. The labour market is also facing similar uncertainty and it is possible there will be increased costs as the market constricts.
While there is little doubt the sector will eventually return to full capacity, it is less clear when this will happen and it seems likely that the cost of many materials may increase.
For homeowners, this has a clear impact on the cost to rebuild their properties, which means now is the right time to re-evaluate their sum insured.
How is the sum insured calculated?
The building sum insured of your home should reflect the amount of money it would cost to completely rebuild the property if it suffered significant damage or was destroyed beyond reasonable repair. This will include the cost of the labour, materials used and professional fees (such as architect fees).
The rebuilding cost is usually lower than the sale price of your home or its market value (although it can be higher in listed properties) as the land is already owned. Costs will be higher if the house is constructed from non-standard materials (not brick built, for example) or has special architectural or historical features. This means it is important to make sure you have an accurate rebuild figure, so if the worst happened your insurance policy would cover the reinstatement of your home to its original glory.
Normally the onus is on you as the homeowner to calculate a suitable building sum insured, which is not easy to assess accurately and can lead to large discrepancies in the actual sum being insured.
Insurers then index link this sum insured on an annual basis. Indexation is a mechanism underwriters use to track inflation and help prevent underinsurance from increased construction/labour costs. However, if the initial limit chosen by the homeowner is inaccurate, indexation may be tracking a false sum insured and could leave them exposed.
Overcoming the challenges
Covid-19 has made it even more challenging to ensure your buildings are insured adequately. Even a recent valuation may need to be reassessed for the following reasons:
- Increased cost of labour – this may occur if the market compresses following lockdown and costs are driven up.
- Increased cost of materials – this is a likely result if supply and distribution channels remain affected and may extend for some time after lockdown measures ease.
- Extended timeframes – fewer contractors may be available and those able to undertake work will be spread over numerous projects at the same time.
The issues that might arise as a result of these factors include:
- Homeowners calculating the rebuilding figure without seeking expert advice, leading to discrepancies and inadequacy of cover.
- An increased rebuilding figure compared to a pre-Covid-19 property appraisal. This emphasises the importance of having a revised survey carried out.
At Lockton, we have some suggestions to help solve these issues, including:
- Undertake an updated survey. This will ensure the sum insured is adequate so that your policy will protect you.
- Some surveys will be provided at the insurer's cost once you have taken out a policy and will be carried out either in-house or by an appointed third-party appraiser.
- The appraisal will calculate the rebuild cost of your property and will factor in any modifications which might have an impact on the value in addition to any revised factors post-Covid-19.
- A professional survey will not only provide an accurate and quantifiable figure which minimises discrepancies, it will also take away the onus on you to attempt to calculate the value yourself.
Several of the policies we offer include an extended or guaranteed rebuilding figure. Importantly, this means that, based on the appraisal outcome, the insurer guarantees to rebuild your home to its pre-claim position in the event of a major or total loss - even if the costs exceed the sum insured shown on your policy.
Get in touch with us if your current policy doesn't include this vital extension. We can undertake a thorough review of your buildings insurance without obligation. To discuss this further, get in touch with our specialist team.
*To read more about the shortage of supplies in the construction industry, visit https://www.constructionnews.co.uk/agenda/11-materials-and-products-in-most-short-supply-20-04-2020/