RCAs set a declared value (DV) covered by your property cover if it is damaged as a result of an insured peril. This is not a valuation figure, but reflects the costs of demolition, professional fees for surveyors, structural engineers and the like, as well statutory authority fees, VAT and other costs incurred when you need to rebuild or reinstate a property.
The Royal Institution of Chartered Surveyors (RICS) recommends an RCA is carried out every three years, or earlier than this should significant alterations be made to the insured property, together with an annual adjustment to reflect inflation.1
Though you may have indexation priced into your policy this may not reflect the true impact of today’s inflation and you may potentially face underinsurance.
Historically, this has been less of an issue than it is now, with data released by RICS2 in February showing tender prices in Q4 2021 rose by 4.9% compared with a year earlier, with the professional body at the time anticipating strong annual increases over the first three quarters of 2022 in the order of 5% to 7% per annum. More generally, RICS observed a number of contractors going into liquidation, strong upward pressure from input costs, increasing demand, materials and labour shortages and ongoing logistics problems, all of which can contribute to higher reinstatement costs.
Meanwhile, according to the Building Cost Information Service (BCIS), tender prices are expected to rise by around 24% between 2022 and 2027, with materials alone expected to go up by around 15% over the same forecast period. This, BCIS said, reflects disrupted global supply chains, and oil price rises exacerbated by the effects of the Russia/Ukraine crisis.3
Let’s say there is a major fire on your property. On calling on your insurance, you realise the RCA has underestimated the DV and you are now facing underinsurance. Should this be the case, your insurer could potentially trigger a policy clause allowing it to reduce payments by the amount of underinsurance. This so-called ‘average clause’ means, for example, if your policy included a DV of £5 million, but the true cost of rebuilding would be £6 million, you have underinsured by 20%. This means if you were to make a claim for £1,000,000 and the insurer applied the average clause, it would reduce the claim pay-out by 20%. This would leave the business with a £800,000 pay-out representing a £200,000 shortfall for the expected costs of repairs.
Under a contract of insurance, the onus is on the insured to ensure the adequacy of sums insured. Given the current impact of inflation, many policyholders would be well-advised to check their RCA values as a matter of urgency.
While some WTW policies do not apply the average clause as long as you have carried out an RCA in the last three years – for longer periods on some policies – we would still recommend if your RCA was completed anything more than around 18 months ago, you review the DV in your policy terms with a view to undertaking a further RCA and amending the policy as required.
To ensure your property is properly covered in light of ongoing inflationary pressures, get in touch.
1 Reinstatement Cost Assessment of Buildings, 3rd edition
2 BCIS five-year forecast (building)
3 BCIS five-year forecast (building) – may 2022
