Is your insurance up to the job?

It’s every asset owner’s nightmare: you pay for insurance for years and, when you finally make a claim, there’s a problem. There are two common issues which may result in insureds not having the level of coverage they expect or need, as well as some new regulations that will have significant implications for property professionals involved in handling insurance for clients. These are three topical insurance issues affecting real estate today. Unoccupied properties At a time of rising vacancy levels on our high streets, the insurance implications for such unoccupied properties become particularly pertinent, but any asset in any sector, commercial or residential, could be affected. People often don’t realise that, if a property is unoccupied, special insurance provisions may apply. In such cases, it’s vital for asset owners or managing agents to let brokers know, so that they can notify the insurer if required, and advise if there are any changes to cover, increases to premiums or excesses, or conditions an insurer will impose, such as shutting off services like water, or requiring regular inspections. In some cases – and where a property is likely to be long-term unoccupied – entirely new, more expensive (yet more limited) specialist policies may be required. These typically only cover fire, lightning, aircraft and explosion catastrophes, but not claims like accidental or malicious damage. The problem is, the definition of what constitutes “unoccupied” may not be obvious, and can vary from asset to asset, or policy to policy. Some policies define it as wholly unoccupied, others will count partial vacancies, for instance in multi-let sites such as shopping centres, office blocks or flats. Most only give 30 days’ grace as standard so a property (or part of it) doesn’t have to be empty for long for owners to get caught out. New builds awaiting tenants could be compromised as much as existing buildings. The bottom line is, if insurers aren’t notified of material circumstances like this, they may not pay out in the event of a claim. Top tips for unoccupied properties: Keep everyone – managing agents, brokers and insurers – informed of changes when they arise, not just at renewal. Check policy wording to understand requirements for vacant properties. Don’t assume that if you switch insurer, you’re getting the same cover. At renewal, find out whether the policy has “partially unoccupied” wording. A policy that only considers an asset unoccupied if it is wholly empty may be preferable. If deemed unoccupied, turn off utilities and schedule regular inspections. For long-term vacancies, board windows, install CCTV and/or arrange 24/7 security. Underinsurance Underinsurance appears to be rife. Recent research by the Building Cost Information Service indicates that UK commercial property underinsurance rates could be as high as 80%, and that the sums insured regularly trail valuations by 20%. This suggests many asset owners or managing agents are failing to follow RICS guidelines and get reinstatement costs reassessed every three to five years, instead relying on policy index-linking to increase coverage to sufficient levels automatically. That’s risky, since that incremental increase often isn’t enough to absorb the real costs involved in rebuilding. If index-linking is even slightly out of sync with reality, over time wide gaps can open up between what a property should be insured for and what it’s actually insured for. Of course, that matters if the whole building burns down and the total rebuild costs aren’t covered. But even for more minor claims, the impact of underinsurance could be significant. That’s because every policy contains an “average” clause, meaning an insurer will apply the proportion by which a property is underinsured to every claim, as an average. So, if the whole property is 50% underinsured, a claim for water damage will only pay out half the repair costs. On the bright side, if you can prove an assessment has been carried out within the appropriate timeframe and you are still underinsured, many insurers will waive the “average”. Top tips for underinsurance: Check records to establish when the last reinstatement assessment was done. Check policy wording to see if the insurer stipulates how regularly this should be undertaken. Arrange an assessment if necessary. Employ a qualified RICS surveyor to do it. Keep a record of the inspection date and ensure it is re-done within recommended timeframes. Consider the VAT position on reinstatement costs – does it apply or not? This is complex but important as it could leave you significantly under- or over-insured. New rules for handling insurance New Financial Conduct Authority (FCA) rules are now in force requiring managing agents involved in placing insurance or handling claims on behalf of clients to receive a minimum of 15 hours’ relevant training per year to ensure they are competent in a range of areas, from market knowledge to business ethics. That’s a big ask for those for whom insurance is not their main activity. They also have to adhere to transparency requirements when dealing with customers and inform clients of the basis and source of their remuneration – not something most managing agents are used to doing. This may be onerous, but unavoidable as a new statutory obligation following the introduction of the Insurance Distribution Directive (IDD) from 1 October 2018. Top tips for the new rules: Speak to a good broker who can organise appropriate training and help you comply. Make sure all staff are aware of their new obligations. Think about how to include this requirement in your company policies. Know your stuff So, there are several important property protection issues to chew on. If there are any common threads running through them, they are these: understand your obligations, whether to your insurer, clients or the FCA; keep dialogue open between asset owners, managing agents, brokers and insurers; and ensure you are continuously monitoring how changes in circumstances might affect your assets or operations. Buildings might be built to last, but it’s a fast-changing world out there. It pays to keep up. James King is a senior executive at Clear Insurance