What Is The Risk Of
Building Underinsurance In Probate?

If you are acting as an executor or administrator, it is your responsibility to arrange suitable insurance for any property in the estate.

In the event of a loss, failure to arrange adequate insurance could result in the executors becoming liable to put things right.

This could result in a significant financial liability for the executors. Particularly as the beneficiaries will seek to be reimbursed for any uninsured losses.

A common issue is building underinsurance.  The impact of providing your insurance provider with an incorrect rebuild valuation could be significant in the event of a claim.

Leading property rebuild specialist, RebuildCostAssessment says that according to their data:

• 80% of UK properties are underinsured.  
• Where property is insured for £500,000 or less, the property is covered on average for just 55% of its true rebuild cost.
• Properties insured for more than £2m, are on average covered for 72% of their rebuild cost.

The rebuild value is not the same as market value.

A rebuild valuation can often be far higher than the market value as it includes:

• The costs of demolishing and clearing away what’s left of the original property;
• Fees for professionals, such as architects and surveyors; and
• The cost of the materials and labour needed to rebuild the property to the same standard as it was before a loss.

There are a number of reasons why UK properties are underinsured:

1. Many people base their building sums insured on the market value of the property.  Which, as you now know, is often incorrect.
2. If the property hasn’t had a rebuild valuation for some time.  This information is often found in a homebuyer's survey report, which could have been provided many years ago.
3. The cost of building materials and labour has increased significantly over the last few years due to inflation.  A report by Buildpartner.com suggests construction costs rose by 24.5% in 2021 and again by another 15% in 2022.  2023 is set to see another big jump in costs. This could mean that properties valued a few years ago could now be underinsured.
4. If the property has been modified to become more environmentally friendly, this can impact the rebuild valuation.  Such as where solar panels or air-source heat pumps have been installed to reduce energy costs.  These fixed installations should be included in the building rebuild value.
5. If the property has had a recent extension, this will increase the property rebuild cost.
6. If the property has undergone modernisation or renovation, these improvements will likely increase the property's rebuild cost.
7. Other examples that can affect the rebuild value include unusual construction, a difficult-to-access location, or being a listed building.

If the building rebuild cost is incorrect, the Personal Representatives could be in for a shock when it comes to a claim.

This is because some home insurers could refuse to pay a claim if the property is significantly underinsured.  But most likely, they will reduce the claim by the amount of underinsurance.

Now consider this fictitious scenario:

• You insured the buildings for £200,000. 
• Later in the year, you need to make a claim for £50,000 to cover the cost of damage caused by a burst pipe, which is a common claim for unoccupied property. 
• The insurer surveyed the property and the damage, but told you the sum insured is lower than the cost to rebuild the property.  They value the rebuild cost at £400,000.
• As a result, they reduce their claim settlement to £25,000, reflecting the level of underinsurance.

This could result in all the Personal Representatives having to find £25,000 from their own funds to cover the difference.

Now imagine this was a fire that destroyed the property.  The loss for the Personal Representatives could have been £200,000, as this would have been the maximum that an insurer would pay in this scenario.

There are plenty of examples of scenarios like this on the Financial Ombudsman website. 

In this case, the ombudsman did provide some leniency to the insured but the impact to them was still a £100,000 loss.

There are a number of options for the Personal Representatives:

1. Immediately review the insurance for the existing buildings.  If it was set incorrectly before, the Personal Representatives will still be liable for the mistake of allowing the insurance to continue with the wrong sums insured.  
2. You can use the ABI’s free rebuild calculator, which can provide guidance on the property's rebuild cost.  You can get an approximate rebuild cost by answering some basic information on the property.  You will need to know the total external floor area.  If you don’t know this, you could measure the building perimeter in Google Earth and multiply the measurement by the number of floors.
3. You could also request a professional rebuild Survey from a specialist like Rebuild Cost Assessment or Barret Corp & Harrington, leading building rebuild insurance valuation providers. 

If all of this sounds a bit overwhelming, there is an easier option: get a quote from Insuristic.

We have developed a policy which is designed specifically to help Personal Representatives insure property that is unoccupied during the probate process.

If the property has 4 bedrooms or less and rebuild value below £750,000 we work out the rebuild cost for you behind the scenes. 

The policy you buy then has a £750,000 buildings sum insured as standard, meaning you don’t need to worry about underinsurance, provided you are confident your property rebuild valuation is below this figure. If you are unsure, we recommend completing a rebuild cost assessment to be safe.

If the property exceeds a £750,000 rebuild valuation, your quote will automatically be referred to our underwriters.  They will be able to provide advice, tell you how to get a valuation and then provide insurance based on a true rebuild cost.

Don't leave your personal liability to chance. Explore our resources to ensure you are fully protected:

• Got more questions? Browse our Probate Insurance FAQs for clear, jargon-free answers.
• Manage your risks: Visit our Probate Risk Management Hub for checklists and guides.