THE BROKER: Under-Insurance, the Valuer’s Perspective
Under the terms of the new Act, which comes into force August 2016, a business has a duty to provide a clear, accessible and fair presentation of the risk. This is based on the knowledge the insured has, or ought to have, following a reasonable search for information.
But how does this apply to the setting of adequate sums insured and what duty does the broker have in this regard?
Alistair Steward, Director with QuestGates, explained that a broker cannot be an expert in all things and the valuation of buildings, plant, machinery and indeed business interruption is a specialism in itself.
For example, a former stately home converted into a boutique hotel, was valued in 2015 by chartered loss adjusters and claims specialists, QuestGates, on behalf of a BIBA member.
We cannot imagine that a ‘fair presentation’ would require the hotel owner or broker to know the accurate value at risk of a listed building like this without expert help, particularly when its setting is taken into consideration – on an island, in the middle of a trout fishing lake!
Would the cost of potentially having to drain the lake to access the ground source heating pump buried beneath, or the cost of hiring a materials ferry to enable reinstatement of the building, the sole access to which is via an iron footbridge, have been considered? And therein lies the problem. More than 80% of the valuations QuestGates undertake within the BIBA Valuations Facility involve under-insurance.
This is not generally intentional – it stems from lack of knowledge by the insuring public and businesses. Too often market value, bank valuations and index-linking applied to previous valuations have formed the basis of setting buildings sums insured and that is where BIBA members have a role to play.
Brokers can help clients conduct a ‘reasonable search’ for knowledge by firstly encouraging them to consider the adequacy of the existing sums insured and the basis upon which they have been calculated.
Secondly, by educating clients about the elements that make up the value at risk including, for example, demolition and debris removal costs, clients will gain a greater understanding of what ‘reinstatement cost’ actually means.
Finally, brokers can add value by pointing clients in the direction of a professional insurance valuation provider if further guidance is required.
While some insurers have mooted the removal of the ‘average’ condition ahead of the introduction of the Insurance Act, this seems only to apply to the smaller risks.
Most businesses will still be subject to a potential proportionate reduction of their claim, with all the controversy and bad feeling that brings, where serious under-insurance applies.
By imparting their insurance expertise, BIBA members can help clients make a fair presentation of risk in compliance with the Insurance Act, as well as bringing about a long overdue reduction in the occurrence of under-insurance.