Average or Average Free
One of the most difficult questions any property owner is asked relates to the insurance value of the building. It bears no relation to the market value and, especially in Scotland, can be way in excess of sale value.
As an example, we have a client in central Scotland where the market value is about £1.5 million, but the insurance (rebuild) value is over £5 million!
What happens if you under-insure and have a claim? It depends on whether your self catering insurance has a condition of average, or is average free. Either way, if you have a (large) claim you will be severely out of pocket – the choice of the sum insured is always yours as the policyholder.
A policy containing average reduces the value of your claim by the proportion of under-insurance. If you are half-insured you will only receive half of the value of your claim.
For a policy that is average free so long as you have not deliberately mislead the insurer in to accepting the risk so as to reduce your premium, your claim will be paid up to the sum you have chosen. However, the problem arises when you are so dramatically under-insured that no claim payment is made, or the cost of rectification exceeds the value for which you are insured.
Clearly, it is desirable to have the correct insurance value. If you have bought the property recently you – or your mortgage provider – will have had a survey carried out and this will contain the insurance (rebuild) value.
But what if you have owned the property for years and have relied upon index-linking to increase the insurance value at each policy renewal? You are almost certainly under-insured as the cost of building materials, as one factor, has increased faster than inflation.
The solution is to obtain an up-to-date professional valuation either from your own contacts, or ask your Insurance Broker to tell you about a desktop survey. The insurance value is to represent the cost of clearing the site and rebuilding (including Listed Building requirements, local authority requirements, road closure orders, architects’ and surveyors’ fees and so on, and so on). There is no clear answer as to whether you should include VAT. Take the advice of your Accountant.
Whilst we hope that the cost of the survey is a waste of money as nobody wants a substantial claim, you will be ever so pleased if you did, and you were unfortunate enough to experience major damage.
David J Morris ACII
Chartered Insurance Broker
J L Morris (Insurance Brokers) Limited