‘Mind the Gap’ in Property and Stock Valuations

Inflation is dominating this winter’s headlines, adding to a perfect storm created by the Russia-Ukraine crisis, rising energy costs, Brexit, COVID-19 and supply-chain issues.

In the property sector, there are particular implications springing out of the economic and political turmoil and its impacts on goods and labour costs. Whether you are a landlord, own a commercial property from which you conduct your business, or are a construction-sector contractor, there are key things to consider, as a matter of urgency.

The first relates to property valuations. Many property valuations are out-of- date or incorrectly calculated – a serious situation when it comes to insuring them. Soaring costs of both materials and labour could mean the current rebuild values of many properties have made the policy limits on their insurance cover insufficient. Many property owners could be underinsured.

Skills shortages within the construction market have seen labour costs rise, due to supply and demand pressures and the loss of EU construction-sector workers.

Supply chain woes have led to the cost of materials, such as steel, cement and timber, going through the roof. Construction firms are having to try to compensate, through their pricing strategies, for eye-watering increases in the cost of Professional Indemnity coverage. With the Building Safety Act 20221, extending the retrospective liability on projects from six years to 30 years, pricing is likely to remain high.

‘Day one’ uplift clauses in commercial buildings insurance policies are intended to protect against the impacts of inflation, between the date the policy was taken out or renewed and that on which damage occurred. However, the rate of inflation is being outstripped by the increases in the price of materials and hikes in labour costs, from which there is no protection. Construction material inflation alone is up 25%, year on year. Property owners must ensure their valuations are accurate, ideally using the services of a surveyor who is a member of RICS (Royal Institution of Chartered Surveyors).

The Financial Risks of Being Underinsured

This situation would probably only become clear in the event of a claim – any claim, not just one for total or major loss. If any underinsurance is detected on a buildings insurance policy, it could lead to cover being cancelled, with no pay-out at all, if considered to have been a deliberate attempt to keep premiums lower. If it were not deliberate, the law of ‘average’ would be applied to the pay-out. The settlement sum would be reduced by the same percentage as the amount of underinsurance on the policy, potentially leaving the property owner many thousands of pounds out of pocket.

The same pressures on costs are impacting construction sector professionals, who price their jobs six to 12 months in advance, and then enter fix-priced contracts. This can lead to significant under-pricing, shortfalls in anticipated income and construction supply chain pressures. This is particularly problematic for smaller firms, that rely on larger ones for on-time payments to keep their cash flow healthy.

Construction firms should work with a broker, to ensure they are fully insuring projects for which they are contractually responsible, to the right level. They should also discuss Trade Credit Insurance, to protect their cash flow and ensure any failure of a customer’s business, or delays in payment, do not lead to their own demise. Trade Credit Insurance can step in and pay invoices, even when a customer does not.

Businesses should make sure they have accurately calculated the value of their stock and have realistic insurance policy limits in place for that. Winter is a key time for stock losses, with both the impacts of weather and theft at their height.

Similarly, business interruption calculations need to be accurate. With all of the market’s cost pressures, everything is rising in price, including the rental of alternative accommodation. The hire or purchase of new equipment and the labour costs associated with fitting out and getting the business back up and running. There is Business Interruption insurance that can cover risks, and you can discuss how indemnity periods can be addressed within this cover too. It does become essential that you take the right advice and consult your insurance broker, so you can assess whether your calculations and cover are right for your business.

Be very aware of what is going on around you in the economy, and remember there is often an impact on your insurance covers, especially if a ‘sum insured’ or ‘declared value’ is involved. Work closely with your broker and do not allow rising costs to impact your business through a failed or much-reduced insurance claim.