Is your organisation insured correctly?
04/10/2024
The ongoing economic outlook has an even bigger impact for the not-for-profit sector, with funding and budget management being more difficult than ever. During financial hardship, it is really important that your organisation keeps up with increasing costs by making sure that your sums insured remain suitable. The last thing you want is for your insurance not to respond, or to respond enough, when you need it most in the event of a claim.
This article provides information on how you can be confident your organisation has the right amount of cover in place, particularly for any buildings and contents.
Difference between ‘Sum Insured’ and ‘Market Value’
When you arrange buildings insurance, you’ll need to confirm the reinstatement sum insured value of the property to your insurer. The reinstatement sum insured is not the ‘market value’ that you may receive if the building was sold, but instead the amount it would cost to rebuild the property following a total loss; for example, if it was destroyed by fire and had to be rebuilt.
It’s important that the reinstatement sum insured value includes additional costs such as demolition of any remaining debris, site clearance, planning and professional fees to rebuild the property. You’ll also need to include the materials costs and labour in your sum insured value. You should make sure that you include any VAT liability that you might have as well.
For contents, you’ll need to provide an estimate of the cost to replace your items you’re looking to cover, in line with inflation. Take a look at our guide that explains this in more detail:
Insuring for the right amount
Property insurance is often subject to ‘Conditions of Average’. ‘Average’ is a principle where insurers reduce the payout if the insured property is underinsured at the time of a claim. This means that only customers who pay a premium proportionate to their true exposure, benefit in full from the common insurance pool shared by customers.
’Conditions of Average’ are used by the insurer to work out how much a settlement figure is in the event of a claim. If you’ve declared the valuation of your contents at £50,000, and at the time of the loss the value of the contents is confirmed to be £50,000, then there is no issue.
There would be a problem though if you’ve insured your £50,000 worth of contents for £25,000. Here, your contents are underinsured by 50% meaning if a claim was to happen, only 50% of the £25,000 declared value would be paid out. This results in your £50,000 contents claim only paying out a maximum of £12,500.
Case Study
A village hall committee took out insurance several years ago, with a sum insured of £300,000 but the actual cost to rebuild the property is £600,000. The hall was partially destroyed by a fire and the committee claimed under their buildings insurance to reinstate the building.
The total project cost, including debris removal, professional fees and repairs to the surrounding car park was estimated at £100,000.
This meant that the village hall was underinsured by 50%. The ‘Condition of Average’ was applied and the insurer made a cash settlement of £50,000. The committee were left with a deficit of £50,000 and the hall was out of action for 3 years whilst funds were raised.
How does inflation make an impact?
Consumer inflation levels hit a 40-year high between 2022 and 2023. This also affected other types of inflation like the costs of material and labour. Public indices for buildings and contents have also seen similar spikes in recent years. To confirm that you have adequate coverage for your insurance, it’s important to check your sum insured when it’s time to renew.. To keep up with inflation, most insurers advise using index linking, which adjusts your sum insured value to match inflationary increases at the national level.
When you receive your renewal from your insurer, make sure to check that your sum insured value matches the amount of cover you think you need.
Steps you can take to make sure you’ve got the right level of cover
Whilst insurers can apply index linking to increase sum insured values in line with inflation, we recommend that your organisation also takes the following steps:
- Keep an asset register to list all of your contents and the value of each item
- Check your declared values are accurate before each renewal
- Use a RICS-certified surveyor to provide up-to-date valuations every 3-5 years
- Check the definition of ‘buildings’ and ‘contents’ in your policy wording: you may find that ‘buildings’ includes gates, fencing, walls, car parks and much more.
- Watch out for VAT; some items are not exempt and instead are ‘zero-rated’ but only for specific scenarios. Other items can attract VAT regardless of the status of your organisation or the land your building is situated on. You should seek professional financial advice in respect of your VAT liability for buildings.
If you’re in doubt about whether your buildings or contents are insured correctly, we recommend you speak to your insurer as soon as possible.
