At a time when we are experiencing the highest rate of inflation for forty years, labour costs increasing and the price of raw materials literally going through the roof, it is vital that householders ensure that their property insurance is adequate for all potential situations.
In the worst-case scenario, when a property is damaged beyond repair, by storms, floods, or fire, it is vital that the owner has sufficient finds for a total rebuild. But with prices continually rising, what can a house owner do to ensure he will have adequate funds available when the need arises.?
One way of doing this is to have an index linked policy.
So, what is index linking?
Index linking is the process used by insurance providers to calculate the real cost of labour and materials needed to rebuild a property and to ensure that the sum insured through the policy is enough to cover all those costs.
Index linking allows the sum insured to be periodically adjusted, in alignment with the rising costs of reconstruction. This will include all building costs and other expenses associated with rebuilding a property from scratch.
How does index linking work?
An insurance policy that is Index linked, means the sum insured is frequently amended in line with anticipated rises to reconstruction costs. It can be based on a range of values, such as the cost of raw materials, labour, demolition of the damaged property and the safe disposal of all waste material, and any other service fees.
What are the benefits of index linking?
Landlords would never want to find themselves in a situation where they end up with a property which is underinsured, i.e., the money they received through their policy would not cover the full reconstruction costs. In this scenario, they would face the prospect of having to meet the full cost of any shortfall from their own resources, which in this economic climate, could be catastrophic.
In some cases, when a building that is underinsured at the time a claim is made, the policyholder may even be subject to an Average Clause. Under an Average Clause, the insurance provider might even further reduce the amount a policyholder could claim, in proportion to the total amount that the property is underinsured by, causing an even greater financial burden on the property owner.
Who provides the index data?
The BCIS House Rebuilding Cost Index provides surveyors, property owners, and insurance services with the necessary information regarding the changing costs associated with rebuilding properties.
What is the ‘sum insured’?
The sum insured is the amount of money an insurer will pay to the policyholder in the event of damage occurring to a building as a result of a range of specific situations.
To avoid the damaging prospect of underinsurance in those situations, it is prudent to monitor the building sum insured to make sure it is enough to cover the rebuild value if the worst was ever to happen.
What is a rebuild value?
The rebuild value of a property considers all the costs of rebuilding the damaged property. It must be noted that this is not the same as market value of the property, which is subject to a whole range of variable parameters in its own right. The cost of rebuilding could, in some cases, prove to be higher than a property’s current market value. As such the market value of a property is not an accurate indication of its rebuild value. In these cases, the sum insured would need to be higher than the market value.
In conclusion
It is essential that landlords ensure that their properties are adequately insured and that all potential costs for rebuilding are covered adequately. Landlord Insurance policies like those provided by “Just Landlords” include index linking as standard, so that policy owners can have the peace of mind of knowing that all their rebuilding costs will be covered, and that there will be no nasty surprizes when the bills start to arrive.
