What is the difference between Buildings Sum Insured and Declared Value?
Your Building Sum Insured
Have you ever found yourself struggling to understand what the differences are between the Declared Value and the Sum Insured on your landlords policy?
Most policies include both these terms and failing to understand the difference may have significant consequences to you. We have recently received an increased number of enquiries relating to this.
Declared Value is the total cost to rebuild the property (including all fixtures and fittings, car parks, pavements and similar property for which you are responsible) at the inception or renewal date of your policy.
It should also include an allowance for professional fees and debris removal costs.
Most importantly, the Declared Value is not the value you would see in an Estate Agents window as this total value will include the value of the land as well as the property built on.
The Declared Value is then subjected to Day One Average or another term used is Day One Uplift. This new enhanced value is called a Building Sum Insured.
In the late 1970s and early 1980s the UK experienced very high inflation rates. At times, the annual rate of inflation approached 25%. This had very serious implications for both insurers and policyholders.
High inflation is a particular problem for property owners. In event of a serious fire it is usually necessary to obtain planning permission before rebuilding commences. This can take many months and sometimes over a year.
If you fixed your Declared Value at renewal and the fire occurred on the 364th day of your policy and it then took a year for planning permission and a further year to re-build, the original sum insured would be three years out of date. If the country was experiencing a 20% inflation rate this would be disastrous.
So for example using an Inflation rate at 20% :
Correct sum insured at renewal £100,000
Re-building cost at end of year one £120,000
Re-building cost at the end of year two £144,000
Re-building cost at the end of year three £172,800
So by the end of the third year from the start of the claim there is a difference of £72,800 which is not covered by the Insurance policy and it would be you who would have to find this additional increase. This is a big loss for a client to bear if the policy did not have post-loss inflation cover.
To protect policyholders from this situation, a number of inflation protection measures were introduced by Insurers.
There are a number of variations to this additional cover, but essentially it requires you to provide a Declared Value at each renewal and this is used as a basis of cover for the coming year. The clause then states that the Declared Value can be increased by up to an additional 50 % of this value – this is known as Day One Average.
Calculating your Buildings Declared Value
It is important to insure for the correct Declared Value if you do not the insurers may be within their rights to reduce the amount of any claim. If you are underinsured the claim can get reduced in proportion to the underinsurance.
Calculating an accurate Declared Value of your buildings does require specialist knowledge. It is therefore always recommended to obtain a professional valuation from a qualified surveyor. This will give you the comfort that the Declared Value is correct. Furthermore, in the event of a claim, settlement will be quicker as you have the evidence of the building value to show to the Insurers.
Lastly, a valuation scan sometime show that a building is over-insured and you could therefore possible reduce your premium following a valuation!