Over the past year or so, we have seen a surge in construction and building material costs.
ONS (Office of National Statistics) data showed that at the beginning of 2021, inflation in the cost of building materials sat at 5.5%₁ but by November that same year, had risen to a staggering 22.70%₂. The Builders Merchants Federation (BMF) highlight that prices for products and materials have risen by between 10% and 15% this year with some, such as timber, seeing a 50% increase and others increasing by as much as 100%*.
Examples of the price increases to building materials**:
- Timber – The price of imported sawn or planed wood increased 69.6% over the last 12 months (BEIS)
- Steel – Fabricated structural steel prices jumped 58.8% between December 2020 and December 2021, but fell 1.6% from November 2021(BEIS)
- Cement – Prices are likely to increase over the next few months due to increased energy costs (CLC)
- Paint – The costs of paints and varnishes are up by nearly a third (Construction Products Association)
- Bricks – Brickmaker Forterra blamed energy costs for raising its prices by over 10% in January
These huge increases, as well as increasing costs for importing materials, mean that the cost of rebuilding or repairing your property, should it/they suffer damage, could well be higher than what you currently have noted as your building sum insured. If this is the case, you will be underinsured.
What has caused the rise in inflation?
There are many factors that are contributing to the increased demand on supply of materials and the tradespeople needed to carry out building works and repairs, including:
- Logistics issues due to shortages of HGV drivers
- The boom we are currently seeing in the housing market which comes with people wanting to start work on their homes whether this be repairs, extensions or general improvements
- Repair and maintenance are also high on the agenda for many due to damage caused by the recent storms across the country
- Increased energy costs, which have caused the production cost of some materials to increase (such as concrete, steel and cement)
- Extensive shortage and backlog in production of supplies, due to manufacturers having to close during lockdowns and experiencing staff shortages due to government Covid-19 isolation rules
- Large infrastructure projects taking place across the country, such as HS2
This demand puts further pressure on building material suppliers and construction companies and has led to the inflation we are now seeing.
The issue of building underinsurance
RebuildCostASSESMENT.com data has highlighted that, on average, ‘buildings are covered for just 68% of the amount they should be in Britain’. This, added to the increased costs of materials and labour outlined above, evidences why we cannot emphasise enough the importance of ensuring you have an adequate sum insured noted on your building insurance policy.
It is important to remember that when insurers talk about your ‘building sum insured’, they want to know the estimated cost of rebuilding your home, not its market value; your property should always be insured for its rebuild sum insured.
The rebuild sum insured includes the demolition costs and debris removal for the old property, architects and planning costs and, of course, materials and labour to re-build.
Should you insure your buildings insufficiently by underestimating the rebuild cost, you run the risk of being underinsured in the event of a claim or total loss. This means you would be financially responsible for a proportion of the cost to rebuild your property to its original state in the event of a claim.
So, what does this actually mean? If you have insured your buildings at £200,000 and the actual cost of rebuilding is assessed to be £200,000, there is no issue. However, if you’ve insured your buildings for £100,000 and the actual cost of rebuilding is assessed to be £200,000, you have underinsured by 50%. This means, should you suffer a loss of £100,000, the ‘condition of average’ would be applied and you would receive a claims settlement of only £50,000, leaving you with a £150,000 shortfall.
Read more about the ‘condition of average’ here.
Establishing your building sum insured
Through McClarrons, you can benefit from a specialist consultative approach at both initial quote stage and at your insurance renewal year on year; this means that we will highlight the need for an accurate sum insured.
We would always recommend investing in an insurance valuation from a Royal Institution of Chartered Surveyors (RICS) qualified third-party. In the event of a claim, you will find it less likely an insurer will challenge the adequacy of the buildings sum insured if you have such a report (so long as it is within 5 years of age). Some insurers will even waive their averaging clause (as discussed above) should you be able to provide them with a copy of a RICS-approved valuation. We can provide details of companies who can assist you with a valuation should you need.
Other things to consider
Some policies include ‘day 1 increase/uplift’ or ‘index linking’.
Day 1 Increase/Uplift: The insurer will increase the buildings sum insured by a set percentage to account for potential inflation during the insurance year. The percentage will vary from insurer to insurer but will usually be between 10% and 50%.
Index Linking: At each renewal, a percentage increase will be added to the building sum insured to take the inflationary impact of changes to building costs into account, such as materials or labour charges. We are seeing the percentage of index linking at an all-time high at present, typically between 8%-15%.
Having either of these conditions in your policy is most certainly an advantage but both are dependent on you having the rebuild value correct in the first place. Keep in mind, these extensions are for inflationary reasons and are not there to compensate for underinsurance at the time of going on cover.
You also need to think about your Business Interruption cover
Business Interruption goes hand in hand with your commercial building’s insurance; after all, if you cannot use your building due to damage, it is extremely likely the business will lose turnover in some form. Depending on your business, you may be insured for loss of gross profit and/or increased costs of working.
In relation to the current climate and supply issues, you need to evaluate whether your indemnity period is long enough to ensure your business is in the same trading position it was prior to the loss when you reach the end of it. If not, you may come to the end of the indemnity period and not be at the same level of pre-loss turnover; this could be a result of not factoring in the current supply issues and tradesman availability within your indemnity limit, for example.
Typically, we see people insure Business Interruption over a minimum of 12 months. At McClarrons, we would advise you to consider insuring for over 24 months as a minimum; if your property is listed or has issues with accessibility or planning restrictions, we would suggest a minimum of 36 months. We recommend extending the insured period because it can take much longer to rebuild a property with permission to clear site, sourcing materials and planning permissions often taking a great deal longer than usual.
A key point is that the ‘condition of average’ we highlighted above also applies to business interruption insurance, so it is worth spending some time to get the sum insured right. If you need help with how to calculate this, please get in touch.
Want to understand more about underinsurance?
It is so important to ensure you have an accurate sum insured noted on your policy to avoid an unexpected outcome in the event of a claim. If you are unsure that your cover is adequate or would like to understand more about the issues of underinsurance, please do not hesitate to contact our commercial insurance team on 01653 609151 or by emailing commercial@mcclarroninsurance.com.
Footnotes & Sources:
₁for the period January 2020- January 2021
₂figure for the period November 2020 – November 2021
*Underinsurance made worse by rising costs (rebuildcostassessment.com)
** Construction Materials Shortage: Energy Crisis Could Drive up Costs
