UKWA FOR WEB - United Kingdom Warehousing Association

10 Insurance
Undercover operation
Underinsurance can be a problem which only comes to light when it is too late. Andy Beavis,
Technical Consultant in the Willis National Technical Practice, discusses the issue
UKWA is an Introducer
Appointed
Representative of Willis
Limited, an insurance
intermediary authorised
and regulated by the
Financial Services
Authority. UKWA is not
able to give you advice
on any general insurance
products or the
Willis services.
It is common UK market practice for
insurance of buildings to be arranged on
a reinstatement basis. That is to say
where a building is destroyed insurers will
provide for its replacement by similar property
in a condition equal to but not better or
more extensive than its condition when new.
Where a building is damaged reinstatement
means that the insurer will provide for
repair of the damage and the restoration of
the damaged portion of the building to a
condition substantially the same as but not
better or more extensive than its condition
when new.
The insurer’s provision is however limited
by the sum insured applying to the building
concerned and subject to the condition of
average. The basic average condition states
that if the sum insured at the commencement
of any loss, destruction, or damage is
less than the value of the property covered
within such sum insured the amount
payable by the insurer shall be proportionately
reduced. Where cover is arranged on
a reinstatement basis the average condition
is usually modified so that no penalty for
underinsurance applies provided that the
sum insured represents at least 85% of the
replacement cost at the time of reinstatement.
This modification is recognition that
there may be inflationary factors affecting
the cost of replacement during the period of
the reinstatement. It should be noted however
that insurers will not pay more than the
sum insured, and the 85% average condition
does not assist if the claim exceeds the
sum insured.
Better protection against such inflationary
factors is achieved by arranging cover on a
Day One reinstatement basis. Under this
arrangement the sum insured is substituted
by a Declared Value and an inflationary
uplift is added to reach the limit of the
insurer’s liability, the uplifted figure being
the sum insured.
The Declared Value represents the
insured’s assessment of the cost of reinstatement
of the building [in accordance
with the terms of the reinstatement condition]
at the level of costs applying at the
inception of the period of insurance ignoring
any inflationary factors which may operate
subsequently. This value should normally
(as indeed it should if cover is arranged
on a reinstatement basis) include due
allowance for professional fees, removal of
debris costs and any additional cost of reinstatement
to comply with public authorities’
requirements, but only where these covers
are not sub limited.
On the Day One basis average still
applies if the Declared Value is less than the
June 2008
www.ukwa.org.uk April 2008