How do we make sure we have the correct sum insured?

The quality of your insurance cover is paramount, but the next most important matter is the accuracy of the buildings sum insured.

As a policyholder you are responsible for ensuring that the buildings are insured for the right amount. Your insurer is unlikely to look at this on your behalf, as establishing a correct sum insured requires specialist knowledge.

If the buildings sum insured is too high then you are paying too much for your insurance. If the buildings sum insured is too low then not only do you run the risk of not being able to rebuild your property in the event of a total loss, you also have the problem of payments for smaller claims being reduced.

In the event of underinsurance, the insurers will normally apply their “Average Clause”. This is a policy condition that allows the insurer to proportionately reduce the amount that they pay you, if you have not insured the property for the full reinstatement value.

The cost of rebuilding a property to the same specification is constantly changing and this cost is normally an upward movement. To help alleviate this issue, most insurance policies automatically increase the buildings sum insured each year by a given percentage, known as index-linking. Whilst this helps, it doesn’t eliminate the problem of over or underinsurance if the initial sum insured was incorrect. The index that the insurer uses, does not take into account any specific construction issues of your property let alone local inflationary factors, so the adequacy of the sum insured may erode.

There is therefore no substitute for a professional buildings valuation. Such a valuation should be carried out on a regular basis and whilst the frequency of valuation will vary depending on the type and size of property, we would recommend that a valuation is carried out at least once every five years.

Obviously any changes to the building in this period such as extensions and improvements need to continue to be notified to the insurers and the sum insured increased to reflect such additions.

It is also worthwhile confirming with your insurer that a professional valuation has been commissioned as it may be possible to agree with them that the “Average Clause” can be deleted. In the event that the valuation is found to be too low the insurers will not proportionately reduce any small claim. However in the event of a total loss, the insurers will still only pay a maximum of the sum insured.

It may also be worth noting that many insurance policies additionally protect against the effects of inflation on building sums insured by including a “Day One” Clause(”). This clause provides protection against the effects of inflation during the period of insurance for a given percentage uplift figure. The percentage uplift will vary from insurer to insurer but will typically be between 10% and 50%.

The insurers still require a rebuilding (building) figure to be given to them, known as the “declared value” and in return they will confirm what the total sum insured equates to inclusive of this Day One protection. For example a property with a rebuild figure of £500,000 which represents the declared value, will have a sum insured of £600,000 if the insurance policy contains a 20% Day One Uplift Clause.

The declared value figure and the sum insured figure are often confused. If the declared value is incorrect then problems may still arise with underinsurance as the Day One Uplift is only meant to protect against inflationary problems and not valuation inaccuracies. The Average Clause will still apply.

When arranging buildings insurance quotations on a “Day One” basis the insurers will need to know the declared value and not the sum insured.

Exclusively flats, it’s our policy.

Have you ever looked at your insurance renewal documents to find your Buildings premium has risen well beyond inflation? Often the increase is due to the cost of your claims, but Belinda Thorpe, Managing Director at Residentsline explains you CAN do something about it.

Risk Management is the key to reducing claims and also to maintaining or reducing your insurance premium. Water damage accounts for around 75% of insurance claims in flats and apartments. It generally occurs following inadequate maintenance leading to corrosion of internal and external pipework, leakage of copper pipe or failure of plastic pipe joints, poor maintenance of seals around bath and shower areas, and accidental damage to hidden pipes.

How to reduce the risk of water damage

First – ensure all pipes and tanks exposed to winter temperatures are well insulated, then

• Be aware of the equipment and installations in your block that are capable of causing a problem, for example, boilers, showers and washing machines. Guidance should be put in place for all residents to ensure regular checks are carried out as part of a planned preventative maintenance programme.
• Advise all leaseholders on what to do in the event of a leak, how to isolate their water supply or shut down central heating systems etc.
• Ensure all leaseholders know where the stop cocks are located. These should be accessible and easily turned. Stop cocks can seize due to minimal usage.
• Only use approved contractors when maintenance, repairs or replacement works are carried out.

In your kitchen and bathroom

• Check appliance inlet and outlet fittings annually.
• Clean door collar seals on washing machines and dishwashers, replacing any that are damaged or worn.
• Annually check that the seal around your bath and/or shower is water tight.
• Don’t allow your bath to overflow!
• Ensure plugs are not in the drain holes when not in use.
• Replace washers in leaking taps and overflowing cisterns as soon as possible.
• Ensure overflow pipes can release water effectively.

With your central heating

• Carry out an annual check on central heating tanks and systems.
• Ensure “shut off” valves are located in easily accessible places and that you know how to use them.
• Check radiator valves regularly for leaks.
• Prior to un-occupancy for more than a few days during the winter period leave central heating ON and at a low setting to prevent the pipes from freezing.

In a block of flats a water leak or burst pipe can cause devastating damage to the structure of the building, electrical wiring, fixtures and fittings as well as damage to contents.

Unfortunately, most water leaks do not inconvenience the flat owner with the leak, but usually the blameless occupier below. Water management devices such as Sure Stopand Leak Safehave become popular with flat and apartment owners – with the mere flick of a switch, water flow is restricted whilst you are out or away.

Actions to take on discovery of a leak

• Turn off the water supply stop cock. Make sure you know where it is.
• If there is no shut off stop cock located inside the flat then it may have a shared water supply, so make sure you can get to the stop valve – this is normally located where the water enters the building, then tell your neighbours, as their water supply may be affected.
• If appropriate, turn off central heating and any other water heating systems.
• Drain water pipes and tanks. Once the water heating systems have been shut down, turn on the taps to help drain the system fully of the remaining water to minimise damage.
• Turn off the electrics if the escape of water is near your electrical wiring or appliances. If any live electrical equipment is wet, do not touch it – send for a qualified electrician.
• Warn the occupiers of the flats directly below so that steps may be taken to reduce the likelihood of any damage to their properties.
• If water starts to seep through the ceiling, place a container underneath.
• Should the ceiling begin to bulge consider piercing the plaster with a wooden broom handle or similar implement to release the water and prevent the ceiling from collapsing. Care may need to be taken against disturbing any asbestos contained in artex covered ceilings.
• Notify your Insurer, Management Committee and or Property Managing Agent and Maintenance Company, as appropriate, as soon as possible and find a reputable plumber to effect repairs. Your insurance company or Residents’ Management Company may be able to provide you with details of preferred and competent contractors.

Afterwards, always remember to make sure that your hot water system is completely refilled again without airlocks before switching on boilers, or switching on immersion heaters in tanks etc.

Water damage can cost tens of thousands of pounds. Suitable measures such as those outlined above will help control your insurance costs.

For more information visit www.residentsline.co.uk or contact the Residentsline Team on 0800 281 235.

Exclusively flats, it’s our policy.

Unsure about the different methods used to protect your insurance policy from inflation? We talk to Managing Director of Residentsline, Belinda Thorpe, who explains, there are two main methods used by Insurers to protect policyholders from the effect of inflation during the period of cover – Index Linking and Day One

Index Linking

Index Linking of your Sum Insured (which should represent the buildings full reinstatement cost) is the preferred option for residential properties. Index linking provides protection for your block against inflation during the period of “insurance without a limit”, and the increase consolidated into a higher Sum Insured at next renewal. There is no additional premium charged for this protection.

Day One

Generally, this clause is used in policies covering commercial properties. The rebuilding cost of the property is stated as the Declared Value on your Policy Schedule and a percentage maximum uplift is provided to cover expected inflation.

For example, if a property has a rebuilding cost of £1m and a 25% Day 1 clause applies, the Sum Insured becomes £1.25m. However, the maximum payable at the time of claim is only £1m plus the inflation percentage to the date of damage.

Condition of Average

It is well known that if a property is insured for, say, 75% of its rebuilding cost, then the claim payment will be 75% of the loss.

However, specialist policies may offer a percentage “leeway” to help prevent the Insured being penalised for inadvertently under insuring. As long as the Sum Insured declared is within the Condition of Average percentage shown in your policy wording (normally 85%) and the shortfall is inadvertent, the policyholder will not be penalised at the time of a claim.

VAT

Does your policy need your rebuilding cost to include or exclude VAT….it’s in the small print.

Exclusively flats, it’s our policy.

Those that make the decision to go through the Right to Manage (RTM) process do so in a very selfless way. They work with the best interests of the individual residents and owners at heart but are often unaware of the inherent risks.

Nowhere to hide

Just imagine for a moment how you would feel if, whilst fulfilling your duties as an RTM director, you are faced with the very real prospect of having all of your personal assets at risk.

The potential for error that can lead to a legal action is very real. When there is financial loss, situations can change and RMC directors can very quickly be confronted with having to defend legal action brought against them and/or other committee members. Ultimately you can be drawn into an action brought by any lessee where they feel you or the RTM has let them down.

Being caught up in a legal action may appear to be unfair when you have been managing your block to help your neighbours, however, in these situations often you are left with little choice other than to defend your position which could be a fairly complex and lengthy affair so substantial legal costs can and do mount up. Who would pay these defence costs?

Simple solutions – the benefits of education and the correct level of protection.

How many RTM officers are aware of the full extent of their potential exposure? Part of the issue and the solution is education.

The potential for legal action against individual RTM officers exists because errors, misstatements, omission, neglect and breach of duty do happen in real life. Consider this from a different perspective – could you imagine anyone agreeing to be a Company Director without (some form of) adequate protection in the form of Directors and Officers Liability insurance? Would you even consider siting on the board of BP after witnessing the company incur a multi-billion dollar oil spill, without first ensuring that you have the correct insurance in place to protect you as an officer or director?

Hidden risks for RTM members

Each potential claim is judged on the material facts behind the particular incident. But the point to remember is those RTM officers whether legally liable, or not, are exposed to the potential risk of litigation and legal costs. Consider a typical scenario where RTM officers are delegated defined responsibilities, including insurance matters, for their block of flats.

During its annual insurance review, the Committee takes the decision to change their existing insurance arrangements and obtains cover with a different provider. The new policy includes a reduced £5 million Property Owners Liability cover. The reason behind the change was to save money and the new policy was chosen because the premium on offer was cheaper than their existing insurance cover.

At a party in one of the flats an over-crowded balcony collapses, seriously injuring several people. A claim against the Insurance Company is incepted with a potential cost of £7.25 million, however the RTM only has £5 million Property Owners Liability cover in place. The individual flat owners are distressed as this amount is well below the potential cost of the claim. The flat owners believe that the RTM was wrong to reduce the cover and they bring legal action against the responsible director to make up the shortfall.

Or perhaps –

An officer pays a contractor to fix their roof with RTM funds before the works have started. Subsequently, the contractor absconds with the money, never to be seen again. There is an exposure to potential legal action being brought by the individual flat owners following the loss of RTM funds due to a mistake made by an RTM member.

Finally –

Consider the potential exposure that may exist if an RTM officer fails to assess the number and extent of defects within a building, compounded by the fact that the RTM officer fails to lodge a claim within the time constraints of the NHBC framework. Funds required to rectify defects are no longer available but could have been covered by the NHBC guarantee. Once again there is an exposure to potential legal action being brought by the individual flat owners due to an error on the part of an RTM officer.

In certain situations life may appear to be very unfair for RMC officers. However a significant part of the solution is to ensure RTM officers understand and are educated in their duties and responsibilities. It also makes good business sense to put protection in place for when things do go wrong. By arranging Directors & Officers Liability Insurance it means everyone can sleep a little easier.

What is Directors and Officers Liability Insurance?

Directors and Officers Liability Insurance protects directors and officers for claims made against them for wrongful acts committed solely by reason of their acting as a director or officer of a company.

What is Corporate Legal Liability Insurance?

It protects your company against the financial consequences of a wide range of claims made against it. Policy cover includes the cost of defence, and in some cases the amount of awards and damages, as a result of claims and prosecutions made against the company in a wide range of situations.

Prices shown below are provided by AVIVA Insurance and automatically include £100,000 Limit of Indemnity for Corporate Legal Liability and Insurance premium tax at 12%

Please contact Residentsline for alternative levels of cover or for any questions or queries on 0800 281 235.

Exclusively flats, it’s our policy.