Landlord Insurance - ‘The Average Clause’

Introduction to Landlord Insurance

A standard buy to let insurance policy will provide you with cover in the event of damage caused to your property. Typically perils include fire, flood, storm, impact, malicious damage, theft, and escape of water. Policies generally also provide alternative accommodation or loss of rent whilst your property is uninhabitable following an insurable loss.

A landlord insurance policy will also provide cover if a tenant or third party is injured within your property, for example, a loose floorboard or a tile falling from the roof.

At East Yorkshire Insurance Brokers we can assist with a single buy to let residential or commercial property to larger property portfolios.

‘The Average Clause’ explained

The majority of landlord insurance policies will include ‘The Average Clause’, if at the time of a loss occurring your property is under-insured, the insurance company will reduce the value of the claim in accordance with the amount of under-insurance. This doesn’t just apply to a total loss claim but claims of all values.

According to Rebuilt Cost Assessment, buildings that are insured for less than £500k are insured for just 55% of their correct rebuild cost.

This could result in the landlord needing to find thousands of pounds to repair damages themselves.

An example of this would be if you insure a property for £100,000 but the correct re-build value is £200,000, in the event of a loss the insurer will only pay 50% of the claim value! This means if a fire was to occur at the property, due to ‘The Average Clause’ the insurance company would not be bound to pay the full value of the claim, even if the total claim value was less than the sums insured.

Setting the correct re-build valuation for your Landlord Insurance

Unlike most residential insurance policies which automatically apply a large sum insured, landlords are expected to set the correct re-build valuation for their commercial or residential properties. Setting the correct sums insured for your landlord insurance can be complicated and unfortunately insurance brokers are unable to give advice on the correct figure, however, we can provide guidance.

When purchasing a new property, we highly recommend carrying out a survey which informs you of the important information about the property and normally advises the correct re-build value for insurance purposes.

However, if you’ve owned the property for a number of years this may now be out of date, you could use the ABI Rebuild calculator for guidance, but we would recommend arranging a desktop re-build valuation through Rebuild cost Assessment. A desktop survey will be more than suitable for the majority of residential buy to let properties and small commercial buildings. Following a desktop valuation, insurers will normally accept this figure for 3-5 years.

There will be a small fee for this service, however this will be a lot cheaper than the potential cost of repairs when an insurer doesn’t pay the full value of a claim due to under-insurance.

You may ask “Can’t I just insurer it for an inflated figure?” Whilst technically you can, you will be paying more for your insurance every year than required.

Don’t rely on Index Linking!

Each year your landlord insurance will increase in line with inflation, and due to the existing levels of inflation this is currently sitting out around 10-12%, in past years the figure has been closer to 2-4%.

Whilst this is beneficial, if your sums insured for your commercial or residential landlord property is already incorrect you will still be under-insured, and insurers will apply average.

This is why we would recommend a re-build valuation every 3-5 years, regardless of your property size.

Where else does ‘The Average Clause’ apply?

You may be a contractor, a manufacturer, wholesaler, shop owner or another type of businesses, but ‘The Average Clause’ can normally be found in the majority of commercial insurance policies. This means that any business who insures contents, stock or any other type of property needs to ensure your sums insured is up to date and accurate.

Other policies to consider - Management Liability

If your property business is a limited company or a residential management company, action can be taken against the directors and officers of the business for a potential breach of their professional duties, e.g. an alleged negligent act relating to your property.

A management liability policy (MLP) will include directors’ and officers’ insurance as well as corporate liability to defend the above as well as paying third-party awards.

In addition to Directors & Officers insurance (D&O), an MLP policy can also extend to include employment practice liability, this protects the business against claims brought by employees, for example, unfair dismissal, discrimination, sexual harassment etc.

A management liability policy will also not include the 51% chance of success clause that a typical legal expenses policy includes.

Still unsure? Get In touch!

If you have found this article useful and would like to contact us about your Landlord Insurance or any other small-to-medium sized business insurance, please get in touch.

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