Graham Bennett of specialist Chartered Surveyors Bennett Kaye Commercial, shares his views on the importance of setting accurate reinstatement values.
Under insurance is a major obstacle standing in the way of a full recovery from a serious loss.
You might think you’ve thought of everything. You’re using the best broker and paying for checks on the roof and electrics and getting fire extinguishers serviced. You have a health and safety policy and a fire risk assessment and have great alarms and locks on your doors. You’ve even asked your accountant for a valuation and he’s told you the official figure on the balance sheet which the broker has used.
So why is there a problem?
You might not be very happy to discover that, following a recent fire that caused £100,000 of damage, the insurer’s loss adjuster said you are only 50% insured. The insurer will only pay out £50,000. That’s £50,000 to find and you haven’t got it. To make matters seem worse the club is insured for £500,000, five times more than the damage the fire has caused.
In this instance, you have underestimated the reinstatement value. The loss adjuster has carried out his own valuation and arrived at a figure of £1,000,000. That’s double the reinstatement value you have declared. The insurance loss adjuster is correctly applying the “average clause” that forms part of all insurance policies. It’s very misunderstood, but it’s important and if you ignore it the insurance may be worth very little when you need it.
What is the “average clause”?
Put simply, if your property is insured for less than it would actually cost to rebuild it, you will not pay a proper fair premium. Therefore, your insurer will pay out only a percentage of your claim, leaving you to pay the remainder. At first it may be seem to be unfair, but in reality you’ve only insured part of your property so you won’t get it all back. If you paid a garage for three tyres, would you expect him to fit your car with four?
What is a reinstatement value?
In order to set accurate reinstatement values, it is vital that all parties take on board what a reinstatement value actually is. Firstly, it must never be mistaken for the worth of the club. The value shown on the balance sheet is a depreciated accountancy figure that absolutely must not be relied upon. The reinstatement value is not in any way connected to the market value of the club.
Your club could be in a rundown area, in poor condition, not fit for your present needs, far too big and built in expensive stone that you would not want to replace. Furthermore, it might be worth very little on the market if you wanted to sell it. All these factors are irrelevant and play no part in setting a reinstatement value. The reinstatement value of the club is literally the theoretical cost of re-building your club to the same size and specification as the existing building. If your club is 15,000 square feet, built of stone with a large car park and bowling green the reinstatement value must be on the assumption that it would be re-built in the same way, that is what the insurer is contracted to do and why there are penalties if the premium paid and the “Declared Value” is set too low.
How to set accurate figures
When setting figures think of starting from a green field and re-building a replica of everything you have. This includes access roads, car parks, boundary walls, gates and fences, patio areas, outbuildings and the principal building. You must allow for permanent fixtures such as bars, fixed seating and the stage. You must factor in an allowance for demolition and site clearance costs and for professional architects and surveyors fees. It is not unusual to find that a run down, seemingly worthless building would cost in excess of £1m to reinstate. You should be especially cautious if your club is a listed building.
What happens if my reinstatement values are incorrect?
The penalties for getting this part of your insurance wrong can be extremely serious. In the event of a major loss there is a severe risk that the club may not recover. If you have any doubts about the accuracy of the figures you have provided to your insurers, you should take urgent professional advice.
Contact the Club Insure team for more information.