So how is the appropriate level of building insurance coverage calculated?

As a freehold landlords'>ground rent investor, head lease, or director of a freehold management company, residents Management Company, or right-to-manage company it is important to check the buildings are insured for the right amount. Else, with a major disaster, any payout may not be enough to rebuild the block and, the principle of averaging will apply to claims.

So, what is the principle of averaging about insurance claims?

Averaging, in insurance claims payouts, refers to a principle used by insurers to distribute risk and determine the amount of compensation for policyholders who experience losses or damages covered by their insurance policies. It involves checking if the buildings are insured for enough, and if not, reducing claims payouts pro rata accordingly. Therefore, when a policyholder makes a claim, the insurer assesses the value of the loss or damage suffered, and based on their policy terms and conditions, determines the eligible payout. However, rather than paying the full amount of the claim, insurers may apply the principle of averaging.

Determining the appropriate insurance cover for any residential building is the job of an RICS Chartered Surveyor or Valuer. The building needs to be measured and the construction methods and components understood, as well as the services, fixtures, and fittings assessed. Ringley's Buildings Insurance Cost Calculator considers these factors and gives a guide based on the building's age, height, etc... Ringley's insurance calculator is considered one of the top-rated tools in this domain. It serves as a valuable resource for individuals seeking guidance or estimates for their insurance premiums.

Understanding the term 'buildings reinstatement value' and the approach

The term 'buildings reinstatement value' refers to the estimated cost of rebuilding or repairing a property to its original condition in the event of damage or destruction. It represents the amount of money required to reinstate the building to its pre-loss state, including both the structure itself and any associated fixtures and fittings.

How to calculate your buildings insurance: a worked example

The building's reinstatement value is a crucial factor in property insurance as first, you have to determine the appropriate level of insurance cover needed before you can know if the premium is right. For example: buildings insurance is sold at a rate per pound, e.g. a building with a 'buildings reinstatement value' of 500,000 may buy insurance at 0.15p per 100 sum insured. So the maths is 500,000/100 0.15p = 750. The insurance premium tax is added.

What is the Insurance Premium Tax for residential building insurance?

In the UK, the Insurance Premium Tax (IPT) is a tax levied on general insurance premiums and is passed on to policyholders by incorporating it into the insurance premium. Insurance Premium Tax arises from the Finance Act 1994 and subsequent amendments and IPT applies to most general insurance policies, including motor insurance, home insurance, travel insurance, commercial property insurance, and liability insurance. It rarely applies to life insurance, permanent health insurance (income protection), or reinsurance.

What is the Insurance Premium Tax rate for residential buildings?

The standard tax rate of 12% for IPT applies to building insurance. The 12% IPT is calculated based on the insurance premium charged to the policyholder. This includes any additional fees or charges related to the insurance policy.

What does a Valuer take into account when assessing the building's reinstatement value? 

1. Construction Type: The type of construction used for the building is another influential factor in determining insurance costs. The insurance rate for a brick house differs from that of a wooden house due to varying risks associated with different construction materials.

2. Age of the Building: The age of the building also plays a role in insurance cost determination. Older buildings may require more maintenance and repairs, leading to higher insurance costs.

3. Construction Costs: This includes the cost of materials, labour, and other expenses required to rebuild or repair the property. It considers factors such as the size, type of construction, architectural features, and any unique characteristics of the building.

4. Building Features: Specific features within the building, such as fireplaces, can contribute to increased reconstruction costs and, consequently, higher insurance premiums.
5. Demolition and Site Clearance: If the property is destroyed, the cost of demolishing the damaged structure and clearing the site to prepare for rebuilding is considered.

6. Professional Fees: The fees associated with hiring professionals such as architects, surveyors, and engineers to assess and oversee the reinstatement process are factored into the value.
7. Building Regulations and Compliance: The cost of meeting current building codes and regulations, including any necessary upgrades or modifications required by local authorities, is taken into account.
8. Location: The building's geographical location is a major factor in insurance premiums. Buildings situated closer to natural disaster-prone areas tend to have higher premiums.

9. Claims History: Insurance companies analyse a building's past claims history to assess the risk of insuring it. Buildings with a track record of frequent claims tend to have higher premiums.
10. Inflation and Escalation: The reinstatement value is then periodically adjusted to account for inflation and any potential changes in construction costs that may occur over time.

How often should you reassess the building insurance value of your property?

It's important for property owners to regularly review and reassess the building's reinstatement value to ensure that their insurance coverage is adequate. The RICS Service Charge Residential Management Code, 3rd Edition suggests that those responsible for the building insurance should have the building reinstatement value reassessed every 3 years.

Underinsuring the property may result in a shortfall in the event of a claim, while over insurance can lead to unnecessarily high premiums. Engaging the services of a professional, such as a qualified surveyor or insurance valuation specialist, can help determine an accurate reinstatement value for the property based on its specific characteristics and the prevailing market conditions - and the Ringley insurance calculator is the perfect tool for anyone wanting to determine if their buildings reinstatement value is about right. It is not a substitute for an inspection, measured survey, and formal valuation.

Online Insurance Calculator for buildings insurance: blocks of flats

The online buildings insurance calculator that Ringley Group offers at https://ringley.co.uk/home-insurance-calculator serves as a guide as to whether your block of flats is most likely under or over-insured. Input the number of flats you have of each type/size, the height and age of the building, and a few other factors, and the building insurance calculator will do the rest. When calculating the insurance coverage for buildings, several factors come into play to ensure that the appropriate level of insurance is established. This online buildings insurance calculator covers most of them.

Last thoughts.... and common misnomers

Market Value: This method determines the property's worth based on what it would sell for on the open market. As it does not consider the cost of rebuilding, this method should not use for insurance, even on new builds. A valid and updated online home building insurance cost calculator can be of immense value in finding a property's insurance value. It is also crucial to give your insurance agent accurate details about your property, such as its size, layout, and special features.