What would happen to my family and I following a major insured incident leading to the destruction of the block in which my flat is located:
- What cover is provided by the insurance company?
- Where would I live?
- What level of benefit can I expect?
- For how long would I be entitled to this benefit?
The main driver for any Residential Management Company, Right to Manage Company or Managing Agent when purchasing a block insurance policy is to cover the buildings; i.e. the physical structure at risk. However, regard should also be given to the insurance provision of alternative accommodation.
WHAT COVER IS PROVIDED BY MY INSURANCE COMPANY?
Block of flat insurance policies include a section of benefit called alternative accommodation to ensure that policyholders whose premises suffer damage making them uninhabitable do not find themselves homeless. Recent unfortunate events at Grenfell Tower have highlighted the logistical and financial fall out of a catastrophic insurance incident i.e. fire. In reality most alternative accommodation claims are for a limited period of time and involve just a short-term inconvenience for minor repairs. But as with all insurance one should consider the worst-case scenario and arrange insurance on this basis. It is only when there is a loss that insurance proves its value so it is imperative to ascertain and insure the correct values when arranging insurance.
The situation at Grenfell, a local authority property, has been highly publicised including the rehousing of a large number of tenants. What would happen if a privately-owned block suffered a similar fate? If alternative accommodation cover is provided, the party to whom responsibility falls to rehouse tenants, till such time as tenants could re-occupy their property, would be the insurance company. Insurance companies are not philanthropic organisations and their policies will clearly state the limit of cover provided under items 1 – 4 above.
Therefore, it is crucial that when arranging block insurance the amount and indemnity period of alternative accommodation be correctly and adequately insured. Emphasis is normally placed purely on the re-instatement value of the building followed by the premium cost of insurance. All parties involved in the arranging of insurance are responsible for the level of cover purchased, but rarely are the levels of alternative accommodation cover questioned: This is an oversight which decision makers responsible for purchasing the insurances can be held liable for.
WHERE WOULD I LIVE?
This would be decided by the loss adjustor handling the claim on behalf of insurers. Dependent upon the likely period in temporary accommodation this could range from a hotel room to a longer term let in a flat or house similar to the policyholders damaged property. But again, the greater the budget provided by the insurance policy for alternative accommodation the more potential there is for a wider choice of properties and perhaps more importantly accommodation in the immediate locale.
WHAT LEVEL OF BENEFIT CAN I EXPECT?
The alternative accommodation limit of indemnity is usually calculated as a percentage of the Buildings Declared Value and can vary between 20% (the standard) to 35% of the Declared Value. So, for example should the Declared Value of the block be £5,000,000 the difference in alternative accommodation cover is £750,000 between a policy with 20% and one with 35%. Most “off the shelf” on line products offer a lower limit. In certain areas of the country such as London where rented accommodation is in short supply, hence expensive, block insurance products provided by specialist property brokers recognise the need to maximise the indemnity limit. Further consideration should be taken into account when calculating the financial limit of indemnity including such items as council tax, the leasing of temporary parking spaces, increased commuting cost etc. when deciding if a 20% limit is sufficient?
For illustration purposes only, we can break this payment down into an individual circumstance. Using the Declared Value of £5,000,000 this represents a block of approximately 25 individual flats. The logic behind this is that each flat is 100 square meters (include voids and common parts), multiplied by 25 flats equals 2,500 sqmt. The rebuild cost per sqmt is £2,000 (obviously this varies with materials used, location, site access, compliance with building regulations etc): 2,500 x £2,000 = £5,000,000. So, in the case that all flats are affected in the block the funds available for rehousing per flat are just £40,000 on a 20% indemnity limit however with a 35% indemnity limit the available funds increase to £70,000 per flat. Obviously, this is just a model which only applies to a total loss and for a partial loss where just five flats are damaged the whole indemnity limit can be used to provide accommodation.
FOR HOW LONG WOULD I BE ENTITLED TO THIS BENEFIT?
The period in which insurers provide payments can also vary from just 12 months to unlimited. In the scenario where a major fire has occurred and there is only a 12 month period of indemnity, payments may cease even before the damaged building has been demolished (especially if there is a police investigation), let alone site clearance, the granting of planning permission and rebuild period. As with the limit of indemnity the period of indemnity also varies product to product but specialist brokers are aware of the need to offer a robust product obtaining an unlimited indemnity period where possible. If unsure as to the likely reinstatement period for the block a RICS qualified surveyor will, as part of their valuation exercise, provide an estimated reinstatement period in terms of months if such an estimate is requested. You can then compare the RICS valuation period to the period of indemnity provided by the insurance policy to ensure adequate cover is provided.
The foregoing paragraph illustrates that there is no one answer, so as a prudent measure it is essential to get the highest level of indemnity possible payable over the longest period. Failure to do so could mean that claims payments may run out before the property is fully reinstated which would leave Policyholder to pay the subsequent monthly alternative accommodation costs until such time as the flat becomes re-inhabitable. This could in turn create a huge financial burden during an already turbulent and difficult time.
LOOK TO YOUR BROKER FOR MORE HELP
Clear Insurance Management Ltd are specialists in the property insurance market. If you’d like further information or advice please contact us today or visit www.thecleargroup.com/for-your-business/property-and-construction/residential-property
For further property insurance advice and guidance please contact: Kevin Donegan | 020 7280 3494
