Buildings can be a complicated, costly and necessary asset.
In addition to the financial outlay in acquiring a property, expenditure continues across its lifecycle – this can be categorised as: –
(1) Purchase and finance costs
(2) Operational & management costs
Some of these costs fall across both fields and have obvious ‘visible’ gains, including the initial acquisition, occupier fit-out, repairs and ongoing cyclical maintenance.
Purchasing a building can be seen through physical presence.
Fit out, repairs and maintenance is visible through activity on site and delivery of an end product.
However, operational costs are less visible but still pay a pivotal role in ensuring a building remains functional, compliant and addresses risk in the event of ‘what if’.
Insurance is one such cost – invisible at surface level, but very much essential.
This blog takes a closer look at Commercial Building Insurance in the event of total or partial loss. Other building insurance requirements can extend to public liability and contents insurance, but here we concentrate on the rebuild value of a building and how that number is reached.
Common Misconceptions
Building Insurance can be confusing, but it is essential that building owners and tenants with FRI leases seek professional advice to ensure they are not left financially exposed in the event of an unfortunate situation.
We would start by saying that there is no causational link between the open market value of a building and the cost required to rebuild. This is a common misunderstanding and a question surveyors hear all too frequently. It is not hard to understand why, when people ask; “how can my building be worth less than the cost to rebuild it”. The answer is not quite as simple, involving several layers of consideration and cost that, on the face of it may not be immediately obvious.
Calculating Rebuild Costs
There have been several high-profile losses in recent years that have affected insurance companies and consequently, insurers are further scrutinising the assets they insure. Again, a reason why seeking out professional advice is so important and to be more precise, ensuring that advice is delivered by suitably qualified individuals.
Following the devastating Grenfell Tower fire, a significant emphasis was placed on the combustibility of building materials. Policy holders have always been obliged to be open with their insurers and make a fair presentation of risk, The Insurance Act 2015 reinforces this and clarifies what this actually means. Companies should be prepared to provide their underwriters with extensive building information in connection with the building, its construction and perceived risk.
The process of assessing the cost to reconstruct a building following damage by an insured risk is a methodical and technical process, relying on the skill and experience of the surveyor undertaking the assessment.
From centuries-old traditionally built structures and steel framed industrial units to buildings formed using modern methods of construction, buildings come in all different shapes and sizes.
To accurately calculate rebuild costs, a sound understanding and knowledge of buildings, construction methods, measurement techniques and build costs are required.
Ensuring a building is insured for the correct value is vital and helps mitigate situations of over and under insurance valuations – either paying higher than necessary premiums or risking a financial shortfall for rebuilding in the event of a claim.
Since the Covid pandemic, the UK’s withdrawal from the European Union in January 2020 and Russia’s invasion of Ukraine, construction related costs have increased way beyond the rate of inflation. This had a considerable impact on the cost of raw materials, manufacturing processes, material demand and the supply of skilled labour.
Linking construction cost rises to the increasing cost of insurance, then the topic of commercial building insurance cannot be ignored.
Costs are further affected by natural forces. According to the Association of British Insurers, recent UK storms cost insurers an estimated £500 million per year in claims, placing increased pressures on an already pressurised industry.
Furthermore, according to research by some global insurance brokers in 2023, just over 40% of commercial buildings in the UK were estimated to be underinsured.
How BAS Property Consultants Ltd can help…
Whether it’s accurate building measurement, considering build cost rates or evaluating external cost influences, BAS Property Consultants Ltd. is committed to delivering a comprehensive picture.
We can provide the answers to help building owners and occupiers make sense of the insurance maze, allowing companies to concentrate on what they are good at – delivering their strategic business objectives.
Aligned with RICS Professional Standard; Reinstatement cost assessment of buildings (UK), BAS Property Consultants Ltd regularly advise building owners and occupiers in making sense of the insurance maze, mitigating their financial risk and ensuring buildings are insured for the appropriate rebuild value.
Radar Trends…
Trends to keep watch for and that can influence building insurance costs include:
The Building Safety Act 2022, inflationary increases, political & economic change, increases to material and skilled labour costs, climatic change and evolving construction methods (such as a move to modern methods of construction) all have the potential to impact future building insurance policy costs.
