The risk of building underinsurance for executors

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.

What is rebuild value?

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.

The causes of building underinsurance issue

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

1. Many people base their buildings 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 homebuyers 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 heat pumps have been installed to save on 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 rebuild cost.
7. Other examples that can impact the rebuild value are if the property has an unusual construction, is in a difficult to access location or is listed building.

What is the impact of buildings underinsurance for executors?

If the building rebuild cost is incorrect, the executors 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 as the executor, 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 escape of water, which is a common claim for unoccupied property. 
• The insurer surveyed the property and the damage but tell you the sums insured is lower than the cost to rebuild the property.  They value rebuild cost at £400,000.
• As a result, they reduce their claim settlement by 50% to reflect the level of under insurance.

This could result in the executors 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 executors 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.  Here is an example: https://www.financial-ombudsman.org.uk/decisions-case-studies/case-studies/consumer-complains-impact-underinsurance

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

How can executors avoid buildings underinsurance?

There are a number of options for the executors:

1. Immediately review the existing buildings insurance.  If it was set incorrectly before, the executors will still be liable for the mistake of allowing the continuation of the insurance on the wrong sums insured.  You can find out more about insuring property in Insuristic’s executor insurance guide.
2. Executors can use the ABI’s free rebuild calculator that can provide some guidance on the rebuild cost of the property.  You can find this here – https://abi.bcis.co.uk/.   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. Executors could also request a professional rebuild Survey.  Insuristic can obtain valuations from Barret Corp & Harrington, a leading building rebuild insurance valuation provider.  The cost of a desktop valuation for properties under £1m is £100+VAT.  Larger properties are priced on application and will require an onsite survey. You can arrange a rebuild valuation here.

How can Insuristic make this easier for executors?

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

We have developed a policy which is designed specifically to help executors 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 £750,000 buildings sums insured as standard, meaning you don’t need to worry about underinsurance, providing you are confident your property rebuild valuation is below this figure. If you are unsure whether it is or not, we would recommend completing a rebuild cost assessment to be on the safe side.

If the property is likely to exceed a £750,000 rebuild valuation, you can speak to our underwriting team directly at SJL Insurance.  They will be able to provide advice, tell you how to get a valuation and then provide insurance based on a true rebuild cost.

You can find out more about our products below:

• If you are a lay executor take a look at our Probate House Insurance page to find out more about our cover or to get a quote online.
• If you are an FCA exempt firm, take a look at Probate Pro, an online solution to help you quickly arrange unoccupied probate property insurance for you as the professional executor or on behalf of your clients. 

You can find out about all of our Probate Insurance products here.

But for quickness, here are a number of useful pages for executors and probate professionals:

• Executor Insurance Guide
• Early Distribution Insurance
• Missing Beneficiary Insurance
• Missing Will Insurance
• Section 27 Insurance