Underinsurance is on the rise. Invariably, it’s only when the Charity needs to make a claim that the hidden risks of Underinsurance come to light. At this point, it’s all too late to avoid the dreaded pitfalls of being Underinsured.

Brown & Brown is a Chartered Insurance Broker that works in partnership with Ecclesiastical, an insurer specialising in faith, charity, heritage and almshouses, who give back their available profits to churches, charities and other good causes.

We asked experts at Higos…

 “What’s underinsurance and overinsurance and how can our members make sure they are not caught out?”

Year on year data from The Rebuild Cost Assessment Survey is consistently showing over 80%* of properties are underinsured and 13% of UK properties are overinsured.

Overinsured and underinsured can severely reduce the amount paid out following a property damage claim, leaving you to cover the remaining cost of any shortfall yourself. This is the dreaded ‘Average Clause’.

1. What does underinsured mean? It means you are not covered enough to protect your assets.

Underinsured leads to:

• Financial Hardship: Major events like serious illness or property damage may leave you covering significant expenses, leading to financial strain or debt.
• Inadequate Repairs or Replacements: you might face insufficient payouts for repairs or replacements, resulting in subpar fixes.
• Emotional Stress: Financial strain from underinsurance can cause significant emotional stress due to unexpected expenses.
• Business Risks: You may face serious financial losses if claims exceed policy limits, affecting property, equipment, operations and residents.

2. What Does Overinsurance Mean?  – Overinsured means you’re paying too much. However, it can have equally as dramatic consequences as being underinsured.

Overinsured leads to:

• Higher Premiums: Insuring property for more than its actual value leads to higher premiums, which is wasted money since insurers only pay up to the item’s true value.
• No Extra Payout: Insurers pay only the actual cost of loss or damage, not the overestimated amount. For instance, if your home is overinsured, the payout will only cover the rebuild cost.
• Unnecessary Financial Strain: Overpaying for coverage can strain your finances, diverting money from savings or investments.
• Complex Claims Process: Overinsurance may complicate claims and insurers might scrutinize claims more closely, causing delays or disputes.

3. What Is the ‘Average Clause’?

Should you find your property underinsured, in the event of an insurance claim your insurer can reduce your claim pay out by the percentage you’re underinsured by. Meaning a claims settlement could be reduced by thousands (and sometimes millions) of pounds, leaving you to fund the difference.

Example of ‘Average Clause.’ – If an almshouse building is insured for £500,000 and the rebuild cost is calculated at £1,000,000, the building would have been insured for only 50% of what the true rebuild cost would have been. Should the unthinkable happen and trustees need to make a claim for a total loss, for example a fire, or even for minor building damage claims, the charity’s insurer would only pay out a partial payment of what it would cost to rebuild. In this instance, 50% would be paid out as the building wasn’t insured for the correct amount.

4. How can the Charity almshouses be underinsured?

• Premises Market value:  A common mistake is insuring what the building would sell at market value, rather than its true reinstatement cost to rebuild the property from scratch.
• Index linking:  Index linking cannot accurately reflect a true rebuild cost; many rely solely on index linking each year for their property insurance, not taking into account regional trends for site clearance, survey costs, architects, legal and planning fees and the cost of labour and materials.
• Automatically renewing:  Renewing an insurance policy every year without reviewing the levels of cover is a common misconception leaving gaps in cover. Many changes can happen during the course of a year such as property extensions, alterations, increased contents and equipment. These can all impact the true reinstatement cost. Reviewing the Charity’s insurance policy each year can help to identify gaps of cover in the insurance.
• Mid-term changes:  If changes or alterations/extensions have been made before the insurance renewal date, the insurer should be advised as soon as these changes are made rather than waiting for the renewal to avoid gaps in cover.
• Out of date property valuations:  A true reinstatement cost for a property should be undertaken by a qualified building surveyor to help avoid a shortfall in cover.
• Insufficient business interruption:  Recovering from a total loss such as a fire or flood can be a lengthy process and may take longer than you think to rebuild from scratch with some cases as long as 24 months. Having your property surveyed by a quality survey engineer can provide an estimated rebuild period, which helps the Charity calculate a more accurate Business Interruption sum insured.
• Insurance market:  As the insurance industry has changed significantly over the past few years from a hardening insurance market, Brexit, to Covid-19 and increased energy and fuel prices, businesses are under severe financial pressure, resulting in opting for decreased cover to limit insurance costs.

In conclusion, regular, thorough reviews of your almshouse charity insurance are imperative, particularly when any changes are made to the site, ensuring the correct cover is in place in the event it is needed. This approach will also give peace of mind to trustees, staff, visitors and residents.

* Data derived from 26,861 Rebuild Cost Assessments completed between Sep ‘21 and Aug ‘22.

posted 1 August 2024

Retrofitting old buildings is a painstaking task. There are often more answers than questions and each answer needs to be given scrutiny  and consideration of unintended consequences in the building.

The National Trust and Historic England have compiled some case studies, shared by our Retrofitting Working Group, that highlight how challenging it can be to assess the right solution.

The document can be downloaded by clicking in the link below:

• Adapting Historic Buildings for Energy and Carbon Efficiency | Historic England

They have also put together a webpage with links that lead to their technical advice and guidance on climate change mitigation and adaptation for resilience, including energy efficiency, retrofit and Net Zero.
They are intended for professionals, contractors, building managers and maintenance teams, suppliers or officials who wish to add to their existing knowledge and understanding to enable informed decision-making. Building owners and occupants may also find it helpful.

To access the below topics , please click in the link below:

• Energy Efficiency and Retrofit in Historic Buildings | Historic England