Property Owners At Risk From Under-Insuring

Nearly half of all property owners are under-insuring their buildings, putting themselves at significant financial risk in the event of a claim.

Norwich Union said it was essential that property owners used the full cost of rebuilding as the basis of their insurance cover. A widespread shortfall in cover in the sector had been highlighted following an analysis of 2007 claims.

A sample of just 47 valuations had also recently revealed under-insurance of buildings totalling £130 million. Insurance claims can be reduced proportionately to the level of under-insurance - in other words, if the amount insured is only half of what it should be, only half of the claim would be paid.

Mike Colmans, property owners underwriting manager, Norwich Union, said that often professional valuations were needed to ensure accurate cover for property owners.

"Under a lease agreement, property owners are obliged to insure their property for the full rebuild cost," he told us. "Often however, property owners will have had a mortgage valuation done, which may not take into account all of the elements involved in the building. For example, the cost of replacing walls, gates and outbuildings or removing debris.

"Therefore, the building will be under-insured and the figure may become increasingly inaccurate over time."

'Common misconception'

Mike went on to highlight the possible severe financial implications of property owners under-insuring.

"They need to be aware that if adequate insurance is not taken out, tighter lending conditions and increased borrowing costs due to the credit crunch could make it very difficult to find the necessary funds themselves to rebuild a property."

He added that as it was usually the tenant who funded the insurance premium, it was a common misconception among property owners that they were doing their tenant a favour by saving them money if the property was valued at a lower amount.

"It is essential that the property owner is aware of and meets their lease obligations, and the resulting premium is calculated on the correct basis," he said. "This makes it vital to have a professional valuation carried out on a property. Norwich Union has a preferred suppliers scheme, so we can recommend a trusted, RICS surveyor to carry out the valuation at a discounted rate."

(01 April 2008)

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