As many as two thirds of blocks of flats across the UK could be underinsured, according to figures from one of the country’s largest insurance valuation companies.
James Truscott, Chairman of Cardinus Risk Management said, “Of the 2,200 reinstatement (valuation) surveys of residential blocks of flats that Cardinus undertook in 2014, some 67% were found to be underinsured.”
His stark warning comes after specialist flats insurance broker Deacon highlighted this issue and its potentially devastating consequences. Last year Deacon found that a Glasgow block was underinsured by over £1m – or 24%.
Had the insurance broker not uncovered the issue for its clients, residents could have found themselves seriously out of pocket if they ever had to make a claim on the policy. Loss adjusters would have been obliged to reduce pay outs by the same 24%. In this case, it was only the experience and proactive diligence of Deacon advisers that led to the anomaly being spotted and rectified.
Deacon managing director Nigel Feast says, “Leaseholders should beware that index linking alone may not provide them with the real cost of rebuilding when insuring blocks of flats.”
Underinsurance can be a gradual process that builds up over many years, as the original rebuilding cost is index-linked without really examining the costs it is supposed to underpin.It may be that the original sum was only an unspecified estimate anyway and, in the case of relatively new blocks of flats, it is often based on the developer’s costs.
These will not include VAT, other than for architects and surveyors’ fees, and this will immediately add nearly 20% to the actual cost of later repair and make-good works. Builders will also have purchased materials and contractors’ labour at favourable, bulk-buy rates.
In the case of a total loss, the 14 leaseholders in the Glasgow block, who own the freehold between them, could have faced a shortfall of £1,160,506 – equating to just under £83,000 each. Smaller claims would also have been adjusted downwards.
Nigel Feast continues, “In this case, it was a genuine oversight, but the potential £1m-plus loss we uncovered serves as a timely reminder to other blocks that failing to revalue and declare the true declared building value is a false economy.”