Landlord insurance and having the correct sum insured
May 14, 2024Landlord insurance safeguards the owners of buy to let property by protecting their business and business assets.
It typically incorporates several features – including public liability indemnity and compensation for loss of rental income in defined circumstances – but the critical protection is against loss or damage to the let property itself and (if required) the contents owned by the landlord.
Getting the correct sums insured
As with any type of general insurance, it is critical to get the correct sums insured. These sums define the maximum amount the insurer is obliged to pay out in the event of a successful claim by the insured.
If you suffer insured losses and make a claim, therefore, the total sum insured is the maximum settlement your insurer will offer. If your losses exceed the sum insured – and even though your insurance claim has been successful – then you will need to make good the shortfall from your own resources.
If you are the owner of buy to let property – protected by landlord insurance – probably your biggest risks of loss or damage are to your essential business asset, the let property itself.
To ensure that the structure and fabric of the property, along with its contents (if required), are adequately protected, therefore, the total sum insured must represent the amount of compensation you would need to receive to rebuild the dwelling and replace all of its contents in the event of a catastrophic incident.
Building insurance – sum insured
If your property were totally destroyed – by an out-of-control fire, for example – how much would it cost to demolish the remains, clear the site, and build its replacement, also taking into account what you would need to spend on the fees of professionals such as architects, engineers, and lawyers?
It’s a vital question when deciding the correct sum insured. If you have underestimated the likely costs in a worst-case scenario, you could be seriously out of pocket or might even be unable to rebuild your damaged property.
Evaluating such rebuilding costs – whether for residential or commercial properties – can be tricky. It is certainly not a simple question of what you paid for the building or whatever might be its current market value – it needs to be the true cost of reconstruction at present-day prices.
To help residential property owners make that calculation, the Association of British Insurers (ABI) in partnership with the Building Cost Information Service (BCIS) has a residential rebuilding calculator that you can use here.
If you are the landlord of commercial premises, you might instead want to refer to the Commercial Reinstatement Tool devised by the Royal Institution of Chartered Surveyors (RICS), which also helps you assess the reconstruction costs for different types of commercial property, together with the necessary external works, site clearance, and professional fees.
Review the sum insured
The cost of reconstructing any building constantly changes over time of course. In addition to the ongoing fluctuations caused by the inflation of property prices, building materials, and labour, there may also have been modifications or improvements that have increased the value – and overall rebuilding costs – of the property.
Therefore, you must regularly review the estimate of rebuilding costs to ensure that the current sums insured remain valid and accurate. A timely occasion, of course, is upon the annual renewal of your landlord insurance policy.
Summary
If you are the landlord of residential or commercial property, it is essential that you maintain the correct sum insured. Unless that is done, you could find yourself seriously underinsured with insufficient cover for the actual rebuilding or reinstatement costs that follow upon loss or damage to your premises.