Property Owners Average Condition

Anyone who owns and wishes to insure a property; beit their own home, a let property or a commercial premises will be asked by their Broker / Insurer the amount of cover they require for the Buildings. The figure given should represent the rebuild value of the property but should also take in to account other factors such as: debris removal, architects, surveyors, consultants, legal fees and VAT and any additional cost of complying with government or local authority requirements.

A lot of the time people will estimate it themselves to be around 60 - 80% of the market value of the property as the market value also takes in to account the land on which the property is built. This may not always be sufficient though depending on where the property is located, its age, ease of access, construction and if the property is grade listed.

On pretty much every insurance policy which incorporates cover for buildings, there will be a condition within the wording of the policy called the "Average Condition". This condition would come in to force where a property owner makes a claim but has not insured their property for a sufficient amount.
It is the property owners responsibility to ensure that they provide the correct value at the time they take insurance out on their property. There are several ways to get an accurate idea of what the rebuild value should be below but if in doubt it is always best to overestimate it (even though it may mean you pay slightly more on your insurance premium).

Gross underinsurance could potentially have quite a disasterous effect on the property owner if the Average condition is applied. The payment made by the insurer would be calculated using the following formula:

(Sum insured / true value at inception) x loss

To put this in monetary terms:

Let's say you own a property and insure it for £300,000 and then suffer an insured £110,000 fire loss, but at the time of the loss the insurers have calculated the building to be valued (rebuild) at £340,000, the insurers would pay (300,000 / 340,000) x 110,000 = £97,059.
This means the property owner would be left to pay the shortfall of £12,941 themselves to get their property fully reinstated where the extra £40,000 cover at inception may have typically cost about an additional £40.

There are several ways to get an accurate rebuild figure for your property. Your mortgage company may give you a figure, you could have a surveyor visit your premises to provide one or there are some online facilities such as the one on the Association of British Insurers (ABI) website.

For more information on what Advance Insurance do, please see our website www.advanceinsurance.co.uk