Buildings Insurance - Calculations : Long Post - Help req'd

[Pford75]

We sufferred some damage to our property during the recent storms and have had to begin discussions with our insurers (Brit Insurance) regarding a claim.

They sent out a loss adjuster, who has basically reported back to the insurers that he believes we are underinsured. Brit haven't yet threatened to adjust the claim, but are suggesting that we need to increase our buildings cover.

Now, when we purchased the house 3 years ago, the survey included both the valuation figure as well as an "Insurance Reinstatement Figure". This value is given as "to include the cost of total rebuilding, site clearance, professional fees, ancillary charges plus VAT". So, upon purchase, we accepted this figure (which was substantially higher than the price of the house). We have subsequently had this cover increased by our insurers standard annual uplift.

The loss adjuster undertook an approximate calculation of floor area (by pacing out the external dimensions of the house). He then reported : ", I calculated a total floor area to your main building at 1764 square metres. Having referred your file to our property valuations department, they quoted a re-building cost per square metre for a Grade II listed building at between £1,652.20 to £2,000. Applying the minimum rate equals a re-build cost of £2,914,128. I then considered the outbuildings at your property and the substantial front wall and the boundary fences and allowed an additional and conservative amount of £150,000 - making a total estimated re-build cost of £3,064,128"

Now - this is almost £750k more than our current cover. We don't want to be underinsured, but surely the survey is a more accurate rebuild figure? Anyone have another view on rebuild costs? I don't want to be underinsured, but also don't want to shell out for cover I don't need.

We've tried contacting chartered surveyors and estate agents, but none seem interested/able in providing us with a figure.

 

[Lime]

It is a difficult one.
On the one hand the insurance company haven't said they will reduce your claim payout but on the other hand they have said you are under insured (according to their loss adjuster) by £750k.

If it were me my decision of what to do next would depend on two things:-
1.Your present claim compared to the increased, ongoing cost of the extra insurance.
2. The amount by which they would reduce your present claim if the increased insurance was not taken out.

Anyway it will probably cost you more money.

Have you explained in a letter how you came to initially value your property?
They might accept it.
Always try to appear that you are being reasonable.

If you think that the loss adjuster's calculation/estimate is wrong you need to obtain a valuation for insurance from elsewhere.

However it is important to remember that the market value and the insurance value can be very different.
Also that most house insurance is offered on the basis that the house is in good repair.

 

[Flyfisher]

The whole issue of under-insurance has always seemed to be tantamount to sharp practice to me. If I insure something for, say £500k, then I expect the insurance company to charge me a premium based on the risk of having to pay out a maximum of £500k. Fair enough.

If I subsequently have to claim for a total loss then I'd expect the insurance company to pay out the £500k. If it turns out that the replacement actually costs £1m then I would expect to lose out because I have under-insured and would just accept the £500k payout, for which I had paid my premium, and put the loss down to experience.

But I don't see how the insurance company can claim that, because I was 50% under-insured, they will only pay 50% of my claim, i.e. £250k, when they have been taking my premiums based on a risk of £500k.

I know under-insurance is treated this way, but I don't understand the rationale.

Given the inherent risks of under-insurance and that period properties are difficult enough to value anyway, it seems completely unfair to me that the insurance industry is happy to let the insured take all the risks in estimating the necessary insurance valuation but then use a 'professional' loss-adjuster to protect themselves if a claim is actually made.

I would be far happier if the insurance company sent out someone to value the property in the first place so that I could be sure I was not going to be caught out by being 'under-insured'. Perhaps some insurance companies will do this, but I've never come across them.

 

[Lime]

I know under-insurance is treated this way, but I don't understand the rationale.

The rationale is to make money.
If the rationale was for the well-being of the insured they would come down in price as the no-claim years passed.
As it is they appear to look for any way to put prices up and to avoid paying out.
The pricing of insurance risk is not perfect however, otherwise all insurance companies would charge the same.

 

[alison]

it's past my bedtime, so maybe I'm being dense, but can't this be resolved straightforwardly by measuring the floor area of your house accurately then multiplying by the amount per square metre (which you don't dispute)?

Surely insurers acting on a floorspace multiple can't just take it upon themselves to invent the floorspace part of the equation?

 

[Pford75]

can't this be resolved straightforwardly by measuring the floor area of your house accurately then multiplying by the amount per square metre (which you don't dispute)?

I can take accurate measurements (but their figure sounds about right), but I do dispute the rebuild cost per square metre. This seems a very high level way of calculating rebuild costs (clearly some listed buildings will have more expensive construction and interior fitments than others).

My main point is that our current insured figure was based upon professional opinion , not our own random estimates. Given that the purchase price also included the cost of the land (which amounts to several acres), it is challenging to believe that it really could cost 3M to rebuild the house!!

 

[Antwerpman]

The whole issue of under-insurance has always seemed to be tantamount to sharp practice to me. If I insure something for, say £500k, then I expect the insurance company to charge me a premium based on the risk of having to pay out a maximum of £500k. Fair enough.

If I subsequently have to claim for a total loss then I'd expect the insurance company to pay out the £500k. If it turns out that the replacement actually costs £1m then I would expect to lose out because I have under-insured and would just accept the £500k payout, for which I had paid my premium, and put the loss down to experience.

But I don't see how the insurance company can claim that, because I was 50% under-insured, they will only pay 50% of my claim, i.e. £250k, when they have been taking my premiums based on a risk of £500k.

I know under-insurance is treated this way, but I don't understand the rationale.

Given the inherent risks of under-insurance and that period properties are difficult enough to value anyway, it seems completely unfair to me that the insurance industry is happy to let the insured take all the risks in estimating the necessary insurance valuation but then use a 'professional' loss-adjuster to protect themselves if a claim is actually made.

I would be far happier if the insurance company sent out someone to value the property in the first place so that I could be sure I was not going to be caught out by being 'under-insured'. Perhaps some insurance companies will do this, but I've never come across them.

I am definately not for the insurance companies and asked this same question myself, so please dont shoot me for this reply.

I think the reasoning is perfectly fine in a total loss situation and then you probably would find yourself getting only what you insured for. However in a partial loss situation what your rational is suggesting is that the insurance should give full cover for the partial loss claimed and that other parts of the building contents which were not affected were effectively not insured as they are not being claimed against.

In another way, in a total loss situation where you are underinsured by 50% you will only get the sum you are insured for, so basically you will receive 50% of the value of all the items insured. Why then in a partial loss situation when you are underinsured by 50% should you receive the full value of these items should they be lost? Surely in both cases you should receieve 50% of the value of the item and this is what the insurance companies pay out.

Hope that is clearer even if it does seem fair still

 

[Mark]

I would measure the property accuratly and also ask for details of how those figures of up to £2K/m2 are arrived at. Maybe someone at RICS (Stephen?) could help on that and with general advice.

I can see that the type of construction and materials used would make a huge difference. Also does that cost include architects / consultants fees in the event of substantial rebuild ? There is potential to argue that some of the costs would only come into play in the event of substantial damage.

Can you restrict cover to the main house and not worry about the outbuildings / wall and if so how much difference would that make ?

 

[Flyfisher]

But in a 'partial loss' situation, the insurance company only has to pay out a part of the full amount insured, so what's the problem?

I think the basic problem lies in the concept of being 'under-insured' and that it seems to be the decision of the insurance company. Why can't we just buy £x amount of insurance, for the appropriate premium, regardless of the value of the assets being insured? If it turns out we're under-insured then that is our problem and we don't receive the full replacement amount. But I really don't understand how the insurance company can use this 'under-insurance' as a justification to further reduce the payout - after all, they've been collecting premiums for the full amount insured, so why can't they actually pay the full amount?

Pford75 has been paying premiums for a maximum £x of payout if certain circumstances occur. Unfortunately, the circumstances have occured so the insurance company should now payout, up to the maximum amount insured, not start a long argument about what the sq.m. total rebuild costs might or might not be in order to try to reduce their payout obligation.

I agree with Lime; it's certainly a way of making money, but I would go further and describe it as a scam.

 

[Lime]

My main point is that our current insured figure was based upon professional opinion , not our own random estimates. Given that the purchase price also included the cost of the land (which amounts to several acres), it is challenging to believe that it really could cost 3M to rebuild the house!!

Yes, it is challenging to believe that it would cost 3M to rebuild your house.
I believe it would cost more if it were possible to rebuild what you have, which it isn't!
Building regulations would put paid to any similar rebuild combined with a lack of skills and materials.
Part of the "value" of your home (to you) is it's age but to the insurance company it's a large house that is old, i.e. not as good as new.
As far as the insurance company is concerned you are buying a big property at a knockdown price because it is used and secondhand.
Their rebuilding calculations are based on modern building techniques and any variation to mimic aged construction is just more expense.
If you attempted to insure your home to be built of the same materials (such as lime mortar) the insurance quotation would be through the roof.

The insurance rebuild costs are just a fiction or fantasy for older property.
It will never happen in real life.

But I really don't understand how the insurance company can use this 'under-insurance' as a justification to further reduce the payout - after all, they've been collecting premiums for the full amount insured, so why can't they actually pay the full amount?

The "full amount insured" is not the true value of any of the property.

If a property were underinsured by 20% the parts of the house are insured proportionately, all less 20%.
When only a portion of it is damaged the repairs don't cost 20% less.

For example if the replacement of a window costs £5000 but it is underinsured by 20% that leaves you with £4000.
That is what the insurance would give you.

 

[middi]

Let us use another scenario.

Let us assume that an insurance co. has accepted the owners valuation of the property and charged a relevant premium. The house burns down " sorry old chap your house was underinsured" is the reply. As far as the insurers are concerned they are quite happy to take your money if you over value or undervalue your property, it makes no difference to them whichever way you make you evaluation mistake.

Are they emplying (somewhere in between the lines) " use us to initially evaluate your property if you want peace of mind", or are they quite happy to take any random sum you wish to insure your property for.

It appears to me that unless one uses their evaluation they will find ground to contest it and litigate.

The insurers always seem to deal themselves a good hand somehow.

 

[Lime]

The insurers always seem to deal themselves a good hand somehow.

What do you expect?

Their purpose is to make money and always has been.

 

[Moo]

This thread is terrifying me, so - some questions:

To whom should one turn to get a realistic estimate (acceptable to the insurance company) of rebuilding costs?

If one's terrace house were to burn down it would inevitably take a fair chunk of the neighbours' houses with it. What are the implications of this?

 

[middi]

Lime is quite right Moo, they are there to offer a service and make money, they will deal themselves the best hand they can get away within the law as it stands.

In you scenario, you get the insurers to value the terraced property and hope they do not charge you a premium on 10 million quid in case the complete row of terrace goes up in smoke.

Mind you unless one is in a forced situation I dont think one has to insure anything by law. there is some choise.

 

[Flyfisher]

But I really don't understand how the insurance company can use this 'under-insurance' as a justification to further reduce the payout - after all, they've been collecting premiums for the full amount insured, so why can't they actually pay the full amount?

The "full amount insured" is not the true value of any of the property.

I understand, and agree, with that but my point is that the true value of the property should be irrelevant. If I'm paying a premium that is valid for £500k of risk then I want to receive up to £500k if I need to claim.

Imagine you own a £1m property - very nice until you retire and can no longer afford the premiums for £1m of insurance. So, you decide to take a risk and insure it for, say, £250k on the basis that if the place does burn down you can take the money and at least buy a smaller place to live out your retirement. What's wrong with wanting to do that?

I really can't see how the actual value of the property insured should be relevant to the amount you choose to insure it for. And once you have chosen an amount, it is that amount of risk that the insurance company is taking on, not the actual value of the property.

The whole thing seems intrinsically unfair to me.

The insurers always seem to deal themselves a good hand somehow.

What do you expect?

Their purpose is to make money and always has been.

True, but there are fair and unfair ways of making money and I've yet to hear a believable explanation of why this particular insurance industry practice is fair.

 

[Flyfisher]

If one's terrace house were to burn down it would inevitably take a fair chunk of the neighbours' houses with it. What are the implications of this?

Same with a semi-detatched or flat, so a very real risk in practice.
I believe this would be covered by the 3rd party or public liability cover in the policy and the insurance co would allow for this risk on the basis that you've disclosed the fact that your property is a terrace, or whatever.

However, it does raise the interesting point of how you are supposed to know the value of the adjacent property so how can you judge whether you're under insured? Maybe under-insurance is not an issue for liability cover?

No doubt it is all explained in your policy small print !

 

[AMc]

I'm not an expert, but this is my humble opinion...

The OP has a loss adjuster in play, my understanding is their job is to minimise the cost to the insurance co. I also believe that insurance co. expect to negotiate on big claims and start with low offers - certainly when your car is a total loss they rarely start with the main dealer list price as a first offer.
It seems to me that what they are trying to do is minimise the payout and softening you up for a lower settlement.

As the rebuild value you got was good enough for your lender and was given by a building professional I think you have some room to reject an initial offer which is too low to reinstate the storm damage.
If it comes to this then I'd start with the Citizens Advice Bureau, then a solicitor if you need to - but in a legal battle they will have the deepest pockets so you need to consider your options carefully. They accepted your professional valuation and insured on that basis so I think you have a reasonable claim to all the money you need for repairs - but I'm not a lawyer.

No matter what happens this company are not going to reinsure you at your current value, so you may need to look at an alternative insurance co. next year and I suspect with a fresh claim and an argument over under insurance they're going to stuff you somehow.



The deliberate "isn't under insurance reasonable?" side debate IMHO is different. If you consider a house worth £1 million and a deliberate underinsurance of £250K - the house is more likely to incurr a £2500 claim than a property worth £250K in the same condition and area. There could be four times more physical property to potentially damage (as a hypothetical - I know real houses aren't built that way).
In a total loss the underinsurees position is fair enough - you only get £250K not the £1 million you need, but a partial loss on your property is more probable than a smaller one and the insurance co. risk is much higher.
For example, the chances of any part of your guttering getting bunged up by a dead pidgeon causing water damage is statistically higher because you've got more gutters.
So I think I grudingly admit that deliberate underinsurance isn't really reasonable, but I still don't think the OP has that problem.

Surveyors have to be qualified and certified, does anyone know what you need to become a loss adjuster? Somehow I doubt it's quite as stringent.

 

[Pford75]

Wow

Thanks for all of the messages and interest. Just to clarify, I don't believe the issue is the current claim (which is probably only 5-10k) and I don't believe that they are seeking to reduce the payout on this claim via the underinsurance argument. (I have good evidence of the value, which I shared with the insurers at the time of purchase).

My issue is around the reinsurance. As AMc pointed out, they are unlikely to reinsure at this level (and I imagine this info would be shared with other insurers). I have no desire to underinsure - I just dispute their reinstatement cost. 2000/sq.m seems very high (although I'm not a builder or surveyor). As has been pointed out, if there were a total loss situation, it is highly unlikely that the building would be reconstructed as it currently stands and many aspects would be considerably cheaper (since they wouldn't have to negotiate around historic fabric etc.)

As large as the current house is, if it disappeared tomorrow - I would have a very long line of builders prepared to construct something much larger and wonderful for 3 million quid!!!

I have now tracked down an estate agent who does insurance reinstatement reports....Jackson Stops & Staff....Strutt & Parker also offer this and I believe Savills as well. But even if I pay for their report (several hundred pounds), what is to say I won't have the same problem in future? After all...I paid for a survey...from a professional...which includes an Insurance Reinstatement figure....but the loss adjuster can just say "I think it should be higher" and my insurers will then demand I increase my cover.

having reviewed various architect and home build sites, the cost of a build is quoted as generally between 60-120 pounds / sq.ft

If I convert 1764 sq.m > 18980 sq.ft. Assume 120 pounds rebuild (which is a big assumption given that we don't have all the mod cons that a 'new' house has > 2.27M....which is a long way from the 3M+ they have quoted.

Really welcome all this advice - any thoughts on how I can challenge the 2000/sq.m figure?

 

[MdB]

Your problem is that there are different values for different things.

Lets say you bought the house last week for £3M (lucky you).

Unfortunately, a spark from the local witch burning causes major damage throughout the house (unlucky you). Cost for careful renovation and repair keeping as much of the original fabric as possible £4M.

It then gets hit by a meteorite and is no more (very unlucky you). The house could be rebuilt from modern materials to look identical - cost £1M. The house could also be rebuilt using traditional materials to look identical - cost £2M.

So what value should you be insured for? I would guess the highest figure and it is how this figure is calculated that is the problem as you suggest. Others here will hopefully be able to help you with this.

Be warned though, if they are claiming that you are under insured at the moment, they will reduce the amount they award you in the claim by a similar percentage. If you should have been paying 25% extra on the insurance due to being under insured for the repair cost then they will drop the claim value by 20%. This is independent of the size of the claim or what the claim is for.

 

[Johneds]

I can confirm that the current newbuild cost for an average house is £1200/m². This has to be adjusted for regional variation, type/size of house, standard of finish and any special fixtures and fittings. You must also add fees and charges - 12.5% is commonly added for this. In your case you must also add demolition costs, disposal costs and removal of the existing foundations. Finally you need to include a figure for outbuildings etc.

The lower end of the range you quoted gives a figure of just over £3m. Working £2.25 backwards gives a figure of £1278/m². I must say, using back of envelope technology, I find it easier to get to the former rather than the latter.