Pension Fund Property Insurance – Q&A

Pension Fund Property Owners’ insurance should be seen as a personal and intimate form of insurance, compared to other types of general insurance as it is insuring one of your most valued investments. With your pension fund and investment strategy being heavily influenced by the appreciation and growth of your property it is therefore crucial that the cover you arrange will be adequate in a worse-case scenario.

 1. What is the reinstatement value?

One of the most common myths of insurance is putting forward the market value of a property for its reinstatement value. Nothing could be further from the truth and many of the causes of underinsurance are from selecting an arbitrarily derived market value.

What is the reinstatement value? It is the figure you provide that represents the totality of all costs to redesign and rebuild your property. This will include a wide assortment of expenses: demolition, removal of debris and hazardous materials; legal and local authority expenses; material, labour and architect’s design costs. The construction market will dictate many of these costs, based on supply and demand in their sector at the time of reinstatement.

What a property can potentially sell for is not a measurement of what the property will cost to rebuild.

Setting the right reinstatement value is a task for a chartered surveyor – with preferential rates from RICS-approved surveyors we can help you arrange this; it is a small cost that can save you substantial sums further down the line.

2. What can be the consequences of a property being underinsured?

Should the reinstatement value be too low then almost all Property Owners’ insurance policies will have an average clause that insurers will have the right to enact, meaning any claim settlement will be proportionately reduced in line with the amount by which the overall property is uninsured. If your value is deemed to have little bearing to the true cost, then insurers could even consider that the insured has misrepresented the risk and has the right to void a policy and refuse a claim.

For example, imagine a fire engulfs part of a property causing damages of £200k to a property insured with a £1m reinstatement value. After the survey it turns out the actual reinstatement value is £2m, therefore 50% uninsured. Consequently, the claim settlement would be proportionately reduced by 50% leaving a claim payment of £100k and a shortfall of £100k. The pension would need to pay £100k towards the reinstatement, and with duties to tenants (and sometimes to further parties) you are likely to be contractually obliged to fund the shortfall.

3. What can I do to prevent underinsurance?

Any level of underinsurance is likely to effect a pension fund’s ongoing liquidity and may even affect  the schemes ability to pay ongoing benefit payments.

A simple step to avoid such a scenario is undertaking a property survey from a chartered surveyor. Technological advancement in recent years has meant that there are now some inexpensive, remote, desktop-based surveys available. Many approved by the Royal Institute of Chartered Surveyors. Most insurers will stand by the figures provided by the surveys – but you must check.

As most policy wordings will give you the benefit of the doubt if you’ve derived your reinstatement value from a RICS-approved survey, this is a quick and effective way to remove the risk and uncertainty that the Average Clause can bring;  to ensure your survey is conducted before the policy incepts and that you review it every three years.

As well as the building value there are other areas in which your Property Owners’ insurance may be inadequate, such as loss of rent, public indemnity and contents cover all of which need regular review.

This is why we have minimum criteria that an insurance policy must have in place.

4. What are Talbot and Muir’s minimum criteria?

The minimum criteria for any insurance arrangement is as follows:

  • £10 million property owners’ liability cover
  • 36 months’ loss of rent cover
  • Terrorism cover
  • No core exclusions are included in the policy
  • If the property is a listed building, a RICS valuation has been obtained to establish the reinstatement value

5. Who pays the insurance premium?

Where a lease is in place, this will normally be on a full repairing and insuring basis so the costs can be recharged to the tenant. However, the costs for any un-let property are covered by the pension.