Elemental RCAs: getting insurance assessments right
Why should assessments be carried out?
Reinstatement Cost Assessments are estimations of the cost of rebuilding property following total destruction and are usually produced for insurance purposes. With very few exceptions, commercial and domestic properties need to be insured on a reinstatement cost basis so every building requires an individual professional assessment.
Under-estimating the reinstatement cost could result in a shortfall of cover and expose the insured to financial risk. Equally, over-estimating costs, or unnecessarily including elements of the building that need not be, will be reflected in excessive premiums. It is essential to demonstrate that the premiums paid, and hence reinstatement cost assessments, have been fair and reasonable and derived from an appropriate and educated assessment.
What’s the problem?
If declared values are found to be incorrect either by being over-inflated on cost or scope, this can result in premium refunds being necessary - an administrative nightmare for both the landlord and insurance broker. Although it has always been important to accurately assess properties and insure them accordingly, premiums are now under greater scrutiny by tenants who have fallen on tough times, so mistakes are more likely to be exposed.
Determining whether or not an assessment is overinflated is a technical exercise and the accuracy of this is usually based on several key factors: the effort the assessors puts into measuring and understanding the property initially; their approach to ascertaining an appropriate rebuild rate; and, perhaps often forgotten, their understanding of the insurance requirements for that property.
The accusation from tenants is often that there is an element of double counting between the landlord insuring the building and the tenant insuring the fit-out – “I’m already insuring that under my business insurance!”. This usually occurs if a landlord is unsure whose responsibility it is to insure the fit-out under the lease and doesn’t want to risk being responsible for the cost of reinstatement. It should be easy to determine this by looking at the lease and seeing who is responsible for insuring which element but, unfortunately, leases are often unclear or even totally silent on this question. How does a surveyor know whether the fit-out has been demised by the landlord and should be insured, or irrespective of that, if the landlord is liable to insure tenant fit-out in any case? Is it clearly understood what is a chattel and what is a fixture?
How do I solve it?
So, in practice, how do you deal with this ambiguity when many assessments are prepared using adjusted average rebuild rates with generic rates applied for fit-out based on the type or size of property? How can you answer a tenant’s query over whether you have included a mezzanine installed in a warehouse, air conditioning installed in an office, or the fit-out of a department store? The answer is that you can’t with any great certainty.
But you could if your surveyor had prepared their assessment elementally (as recommended in the RICS guidance note). If you can identify in the build-up of the rebuild rate a specific allowance for the mezzanine in the warehouse, for example, then you can answer the question; you can even remove it if it’s agreed that the tenant will insure and provide an updated report. The tenant is happy that there is no double counting and the landlord is happy that they do not have to insure it.
At Hollis, we conduct thorough reinstatement cost assessments using an elemental approach to establish the most accurate re-building rate for your property, eliminating the uncertainties that average pricing can cause. This reduces the risk of either over or under-estimating the rebuilding cost, giving greater transparency and fairer apportionment. And, most importantly, helping you to avoid any challenges from tenants over incorrect premium costs. Get in touch with James Key for more information and advice.
James Key | Partner
T: +44 (0) 7717 342 087
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