EDITORS LETTER IN THIS ISSUE: Property Week’s supplement exposes the risks of underinsurance VIEW Property Looking at the UK property owners’ business Firm foundations Five pointers to make sure property is fully insured Losing the plot? Gypsy and Traveller rights and how best to protect vacant land Des res with cannabis farm Organised criminals are using homes to grow drugs Think green; avoid falling into the red Why building reinstatement costs must factor in eco-friendly planning requirements underinsurance in association with AVIVA R e-valuation The risks of Reinstatement costs Regional values Premiums PW_roundtable_Aviva_02_Aviva_JUN2010
Transcript
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EDITORS LETTER
IN THIS ISSUE: Property Week’s supplement exposes the risks of underinsurance
VIEWProperty
Looking at the UK property owners’ business
Firm foundations Five pointers to make sure property is fully insured
Losing the plot? Gypsy and Traveller rights and how best to protect vacant land
Des res with cannabis farm Organised criminals are using homes to grow drugs
Think green; avoid falling into the red Why building reinstatement costs must factor in eco-friendly planning requirements
A t Aviva, we pride ourselves on being specialists in commercial property insurance. ‘Property View’ is our new magazine that’s
here to discuss, and keep you up-to-date with, the matters of the moment in your sector.
For the first edition, we’ve teamed up with ‘Property Week’ to expose the problems caused by underinsurance in the market. With 77%* of all properties being undervalued, this is clearly a widespread concern. A round table of specialists address the issues faced not just by insurers, but brokers and commercial property owners too.
Also in this issue, we take a look at the rise of scrap metal theft and use of domestic dwellings as cannabis farms. We explode the myths around Gypsy and Traveller rights and look at ways to make sure vacant land is best protected. And Dermot Rollins gives
a broker’s view on the growing need for proper fire risk assessments.
Your feedback on this first edition would be much appreciated, as we plan to publish ‘Property View’ quarterly. Please send your comments by email to [email protected] Thank you.
Carl Whayman Chief Executive, Lee Baron Consultant Surveyors
*Sourced from Barrett Corp & Harrington surveys 2008-9
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CSR AND GREEN PROPERTY
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Property owners are advised to check their policy covers the most stringent environmental planning regulations, as well as ensuring their buildings are professionally valued for insurance-cost purposes.
Thinking ‘green’ is a necessity for property ownersReinstating a property following a loss can be more costly than envisaged, with ever-stricter planning requirements to improve energy efficiency and protect the environment. In fact, there are several reasons why thinking green makes sound business sense.
L ocal authorities are charged with reducing carbon emissions wherever possible. Given that the heating and lighting of properties contribute
significantly to global warming, many are making it their priority to reduce the greenhouse gases released from buildings.
“Planning requirements are an important consideration when it comes to insuring properties, providing an even greater onus on owners to have their buildings’ reinstatement costs professionally valued,” emphasizes Matthew Gordon, underwriting manager within Aviva’s Property Owners segment team. “Insurance policies need to cover the additional costs involved where planning law requires owners to reinstate buildings in a more eco-friendly way.”
If asked to consider alternative building methods, property owners can face considerable delays during the planning-application phase, with a knock-on
effect on business interruption. “In one example, it took seven months for a policyholder in London to obtain planning permission following a fire. The delay was caused by ongoing discussions with the relevant authority about changes to the original rebuilding plan to include a more environmentally friendly design.”
The case is far from unusual. “Another of our policyholders in the leisure sector was subjected to considerable delays in reinstatement when the local authority demanded improved thermal efficiency and on-site power generation. Fortunately, the business had adequate insurance protection. Otherwise, it would have suffered a huge loss in revenue.
“It goes without saying that delays in reinstatement can be costly to a business so property owners should make sure they have adequate cover to protect against loss.”
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CSR AND GREEN PROPERTY
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POINTERS
Reducing a building’s carbon footprint and energy billIn existing buildings, changes can be as simple as using timers to control heating and lights.
More significant options include**:– introducing a rolling replacement
programme of filament light bulbs with energy-saving compact fluorescent lamps
– using biomass instead of oil heating– adding ‘load balancers’ to gas
boilers, making them up to 15–20% more efficient
– using a ‘Power Perfector’ – an efficient transformer (240v-200v) can reduce power consumption by up to 20%.
In new-build properties, developers should consider:– creating more natural daylight, with
an east-west aspect as opposed to a south-north one
– using sustainable materials in the build process
– installing double glazing and ensuring the building is properly insulated
– using evaporative cooling instead of refrigerant air conditioning, which costs up to half the price to install and a fifth of the cost to run
– installing inter-flush devices in lavatory systems (siphon rather than valve) to cut back on water usage by 20-40%.
In the right circumstances, it is possible to offset installation costs against corporation tax or an allowance for
qualifying expenditure. See www.hmrc.gov.uk and www.eca.gov.uk for further details. This allows 100% of the cost of some eco-improvements to be written off against taxable profits during the first year. There are also allowances to cover part of the ongoing costs. See www.eca.gov.uk for further details.
It goes without saying that delays in reinstatement can be costly to a business so property owners should make sure they have adequate cover to protect against loss.”Matthew Gordon, Underwriting Manager for Aviva’s Property Owners segment team.
The grass is greener…Aside from guarding against reinstatement costs, there are other advantages of thinking green. Property owners with large portfolios are keen to demonstrate their support for the environment and a significant number have vigorous Corporate Social Responsibility (CSR) programmes. Such initiatives are of increasing interest to underwriters when assessing properties. “A well managed and maintained property and a strong CSR agenda demonstrate that a property owner is both responsible and proactive at managing risk,” adds Gordon. “This will have an influence on an underwriter’s view of the risk and, in turn, on premiums.” Companies such as Aviva, the first worldwide carbon neutral insurer*, are keen to support property owners who have a good business ethos and look at the impact of their activities on the wider community.
“Insurance policies can be extended to support the CSR programmes of property owners. For example, our ‘Green Clause’ is available to selected property owning clients. It can cover additional costs incurred where, following insured damage, owners choose to reinstate their property in a more environmentally friendly manner.” For further details, policyholders should contact their insurance broker.
Conversely, leasing a ‘green building’ can boost a tenant’s eco-credentials, which is invariably an important consideration for blue-chip organisations when choosing premises. “It’s possible to build green elements into leases to help demonstrate a property owner’s environmentally friendly credentials to tenants or investors. For example, our ‘Green Clause’ is available as part of our ‘Prestige for Property Owners’ product.” Known as a ‘green lease’, such agreements set out a commitment – on the part of both the tenant and the landlord – to do all they can to maintain the building in an eco-friendly manner. “The terms of such a lease can vary, depending on the property. What may be appropriate for a brand new ‘green building’ may not be appropriate for an older property. Elements can include the tenant allowing the landlord access to carry out environmental audits or both parties agreeing to use sustainable materials to make repairs.”
Some clauses are easier to incorporate into conventional leases than others, but experts predict such agreements will increase in popularity in coming years, with developers increasingly being forced to build greener buildings and occupiers demanding that eco-elements are incorporated into their rental arrangements.
Aviva’s ‘Guidance for businesses on managing your flood risk’ adopts a five-prong approach to tackling this growing concern.
1. Before any flooding occursBusinesses should assess the likelihood of this risk by considering a range of factors and, where necessary, take the appropriate action to be ready for such an event, from raising the elevation of critical equipment and stock to anchoring fuel storage tanks and preparing ‘flood kits’.
2. When flooding is imminent There are a number of simple steps people can take to restrict damage, including turning off utility supplies and, if there is time, relocating vulnerable stock.
3. During a flood The guide points out some essential safety precautions and need-to-know facts. For example, six inches of flowing water can knock over a person. Two feet of water will float a car.
4. Following a floodCarrying out several actions will assist with recovery times and speed up the settlement of claims, from removing covers on air bricks to allow air to circulate and trapped water to escape to taking photographs of the damage.
5. After the eventThe guide also gives details of flood-resilient repair techniques to reduce damage and disruption in case flooding takes place again.Take a look at: http://www.floodplanuk.org/This site is a useful tool in the event of a flood, providing information and practical advice on flooding and community engagement.
Over the next 12 months, the guide will be included with policy documentation when commercial property policyholders renew their insurance cover with Aviva. However, if you would like a copy in the meantime, please email [email protected] with ‘Flood leaflet’ in the title.
* Aviva - www.aviva.com/media/news/2954/** Aviva, Energy and Utilities Guidance for New Builds and Refurbishment, 2007
Five ways to reduce flood damageFloods across the UK have highlighted the devastating impact that natural events can have on property, businesses and people’s lives. Aviva’s latest guide, produced for its commercial policyholders, gives practical measures to help limit flood damage and speed up recovery times following an event.
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CANNAbIS fARmING
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‘Five-bedroom house, with cannabis farm’Detective Inspector Joe McKerns, one of Strathclyde Police’s organised crime experts, talks about the increasing use of domestic properties as cannabis farms and a working partnership with Aviva and other organisations to disrupt these criminal activities.
S trathclyde Police, one of the largest police forces in the UK, protects the west of Scotland, from Glasgow’s lively urban areas to the rural
remoteness of the Inner Hebrides. “Over the last four to five years, we’ve seen an escalation in the use of domestic dwellings as cannabis farms,” explains DI McKerns. And Scotland is not alone. This is a UK trend, repeated up and down the country.
The facts speak for themselves. “In 2009, 89 operations were discovered in Scotland,” says DI McKerns, quoting UK Home Office sources. “In 2007 to 2008, 50 out of 58 forces in England, Wales and Northern Ireland found cannabis farms. There were 352 in total, growing drugs worth an estimated £60 to £62 million. 94% of these operations were in residential properties.”
Given the scale of the problem, it is surprising not to hear more about cannabis farming in the news. “We’ve had a fair amount of media attention in Strathclyde and a programme was aired about the issue (‘Hash in the Attic’ on BBC One Scotland). But cannabis is widely regarded as a recreational drug and doesn’t make the headlines in the same way that cocaine or heroin does.”
In the UK, cannabis farms were first run largely by South East Asian organised criminal groups. “Now the indigenous population has learned how to cultivate the plant. We’re seeing large farms in residential properties. The trend has been fuelled by the boom and bust of the buy-to-let property market. Some landlords have been less discerning when letting properties and this factor has contributed to an escalation of cases.”
No postcode is safe from the crime, no matter how desirable. “It takes place in urban and rural areas of all descriptions; in flats, houses and some commercial properties. We recently discovered two, five-bedroom houses on the outlying countryside, each worth £330,000, that had cannabis growing in every single room. The damage was enormous.”
The criminals had destroyed both properties from top to bottom, “punching holes through walls and floors for ventilation purposes and to run water pipes and electrical cabling. The wiring was extremely dangerous, with nasty traps set on door handles into the property… There was extensive water damage.” Added to all this, fires from power surges are commonplace, placing the lives of nearby residents at risk.
Over the last four to five years, we’ve seen an escalation in the use of domestic dwellings as cannabis farms.”
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CANNAbIS fARmING
Besides insurers suffering, property owners and broker accounts are also adversely affected, with profitability and loss ratios being affected for years.”Tackling organised crime requires an approach from many different directions. “We’re always keen to work with partners to disrupt criminal activity. Aviva approached us at a seminar about the problem. Given that the national average repair bill is £30,000 per property* it’s clearly a serious financial concern.” Aviva has been tracking cannabis farm claims since 2007. “We pay millions every year as a result of this type of crime and it’s not just an issue for us, but for all insurers,” adds Pauline White, Regional Property Owners Consultant at Aviva.
“The insurer has been tremendous in educating the market at a timely opportunity, when landlords are seeking insurance to cover their letting needs,” continues
DI McKerns. “Aviva has been pointing out what to look out for and the type of tenants to avoid, as well as making sure that landlords have the right cover in place rather than standard home insurance.” The insurer is keen to emphasize the value of property owners speaking to insurance brokers to make sure they have the right level of insurance cover and also of using professional letting agents. “Our experience with Aviva means we’re broadening this approach further within the industry. We’re already in contact with the Association of British Insurers.” As well as producing communications on the issue, Aviva is working with the police to develop workshops that will further raise awareness with brokers and end customers.
Other police working partnerships involve utility suppliers, who are left to pick up huge bills as a result of cannabis farming, and Crimestoppers, enabling concerned members of the public to report potential criminal activity anonymously.
Advice for residential property ownersWhat to watch out for:– short-term lets of between three
and six months– where a chunk of rent is paid in cash
upfront (sometimes in full)– where tenants continually fail
to provide references– leasing arrangements – property owners
should build in requirements for external and internal inspections.
What criminals look for when ‘house hunting’:– landlords who do not use a managing
or letting agent– landlords who do not vet tenants
sufficiently with background checks (just seeing a passport isn’t a good-enough check). At Aviva we have a standard vetting form which Aviva
residential property owners can find on our site at aviva.co.uk/landlord
– landlords who do not inspect properties internally regularly
– where sub-letting is allowed and there is no control of sub-tenant activities.
Helping to avoid the problem:– do not accept rent in cash. Insist
on payment through a bank or building society
– carry out regular inspections of premises, with internal viewings
– be wary of short-term lets without undertaking rigorous vetting of the prospective tenant
– do not allow sub-letting– employ a letting or managing agent
as they will vet tenants and undertake inspections on your behalf.
WelcomeAs the UK’s largest insurer, we at Aviva look to understand and help
to educate our customers on issues we feel could affect them. Forthis reason, we were keen to bring to the attention of our
customers a gap in the current commercial property insurance market. Research carried out by our third party suppliers, Barrett Corp &
Harrington (BCH), found that 77% of properties valued in 2008-9 by BCH were undervalued. This shocking statistic made us realise that weneed to raise awareness of this issue with our customers and brokers.
Underinsurance seems to be a market-wide issue but this has alsobeen made more prominent by the recent economic downturn. When
times are tight, businesses are rightly looking for places to save money. However, we want toensure that if the worst does happen, these businesses have the right level of cover.
As this problem is becoming more prominent, we decided that we would work with experts inthe field to work out ways in which we as insurers, valuers, brokers and property owners couldaddress it.
We would like to thank Property Week for giving us the opportunity to hold this discussionand to highlight the issue that underinsurance is causing in this market.
Janice DeakinDirector of intermediaries and partnerships
Tel: +44 (0) 20 7921 8350United Business Media,Ludgate House,245 Blackfriars Road, London SE1 9UYwww.propertyweek.com
An accurate and professional propertyvaluation is vital to ensure the ownerwould be fully covered for the costs of
reinstatement should a claim be necessary.However, Barrett, Corp & Harrington (BCH)conducted a survey of all the valuations itcarried out in 2008-2009 and a staggering77% of the buildings were under-valued.Moreover, of the re-valuations that werecarried out, an approximate 50-55% uplift inreinstatement costs was required.
Underinsurance can have expensive
consequences, including inequitableinsurance premiums and inadequate cover.Tenant's business could also be impactedwhere a reduced claim settlement results in
the building not being able to be reinstated, inparticular, where they do not have a breakclause or where they are unable to exercise it.
During a recession it is prudent forcompanies to manage costs more carefully,and reduce premiums where possible, but theprospect of settling a loss well below thecosts of reinstatement should be an adequatedeterrent for underinsurance. This isparticularly true when you consider thebanks today are less likely to supply funds tohelp bridge any shortfall.
IGNORANCE OR DECEPTIONThe most likely explanation for propertybeing underinsured is ignorance. People useold, out-of-date valuations not realising, or
If companies have a re-valuations programmein place, it would protect the whole basis ofwhat we do and protect the client in terms oftheir own funding.
Simon Martell, Aviva Property Owners Insurance Team
� The vast majority of property owners risk significant financial loss by underinsuring their buildings,according to research carried out by Barrett Corp & Harrington. Property Week invited four propertyinsurance experts to explain why this has become such a widespread issue, and to suggest solutionsto this potentially expensive problem.
Industry facesunderinsurance woes
even taking the time to consider, that theymay have changed. Simon Martell, BusinessManager, Aviva Property Owners InsuranceTeam, explains: “A lot of working time is takenup in getting re-valuations done. Dependingon the size of the client and the sector theyare in, they may not have a re-valuationsprogramme in place. If they did, it wouldprotect the whole basis of what we do andprotect the client in terms of their funding.”
The definition of ‘buildings’ can also varywidely between insurance companies and it isvital the surveyor is aware and accounts forthe extent of cover and whether it includessuch items as street furniture, landscapedgardens or contents of common parts.
In rare cases, some companies – often thosealready suffering financial difficulties – willpurposefully mislead insurers in an effort tokeep premiums low – a short-term answerwith onerous long-term consequences, if everthere was one. More often than not thoughunderinsurance is a genuine mistake. Usually,the first time a company is aware they have aproblem is when they want to make a claimand discover they are not covered sufficiently.
This would be the case for example if therebuild would create a better property thanthe original, such as with the installation of asprinkler system or any other environmentalimprovement. Steven Rust comments: “You’revery rarely going to reinstate a building asexactly the same building that was therebefore. It probably needed updating anyway.And at that point, the insurers will take intoaccount any ‘betterment’ element. So there isalways a negotiation.”
IMPROVING THE SYSTEMThe lack of an existing legal structure is seenas one of the major obstacles to gettingproperty insurance right. While funds andREITs will have re-valuations on a veryregular basis, there are numerous companiesthat do not have an automatic system in place.
Carl Whayman, Chief Executive, Lee BaronConsultant Surveyors, believes there shouldbe a more regulated system to encouragemore frequent valuations: “The market isoften caught up in the transactional side ofthe business where not necessarily the mostpressing thing an investor’s thinking of is thedeclared value and the insurance. They’relooking at bank debt, rate of return,occupancy, tenancies and so on. I think a very
The responsibility of Right To ManageIn 2003, leaseholders of flats becamelegally entitled to take over themanagement of their building through aRight To Manage company, as long ascertain criteria were met. Martyn Barrettexplains the consequences of suchauthority and why this is becoming a keyissue for insurance companies: “It is agreat attraction to be in control of yourown destiny, but it comes withresponsibilities, and people that putthemselves forward as directors ofresidents’ management companiestake on the responsibility forsetting that sum insured on behalfof all the residents. Although we’vegot an increasing number of Right
To Manage companies coming to us toget their valuations right, there will stillbe companies that believe they are doingeverything right, shunning a Directorsand Officers policy. But they might not bedoing everything right. They don’t wantthis coming back onthem, and itwould.”
The market is often caught up in the transactional side of the business where notnecessarily the most pressing thing an investor’s thinking of is the insurance.
years. That way, all the variables will betaken into account and you’re less at risk of aclaim shortfall.
Another cause of underinsurance could bethe use of index-linking. Historically,commercial property insurers have usedindices such as the Tender Price Index (TPI) toadd to their base figures to update for inflationeach year. However, changes in building
regulations and local market variations willnot be reflected in the changes in indices, sothe index may be considered a blunt tool.
Martyn Barrett explains: “There are otherfactors which would go into such an index,which should be more like a final accountindex, as opposed to a tender index. It is wellknown that in recessionary times thatbuilders will tender low but, during thecurrency of that contract, they will do theirbest to make up for any shortfall if they’ve‘bought’ the work just to maintain turnover.So you get many more claims for extensionsof times, inclement weather, just extra costs.The construction lawyers and claimsconsultants do very well in a recession. Theinsurer can’t duck out at the tender levelwhen it comes to a claim. They’ve got to gothrough to final account stage, and may endup paying more than the tender as they arecontracted to pay the insured the cost ofreinstatement. So we’re advising: don’t be tooquick to reduce your portfolio value by theTPI, because you could catch a cold.”
ROOM FOR MANOEUVREOf course, even if the valuations aren’tperfectly aligned, there is often flexibility.
COSTLY ERRORSMartyn Barrett, Director of BCH, insurancereinstatement cost valuers, believesawareness needs to be raised to preventcompanies from making such costly errors:“Our experience is that the underinsuranceproblem is across all classes. Everything fromdwellings right the way through to hugeportfolios, and the portfolios actually offersome of the widest variation in valuations. Ithink it is ignorance more than a deliberatemanipulation of figures, but clients oftenrespond to valuations by not wanting to paythat level of premium.”
Focusing on the premium, rather than thecover it affords, is a common problem acrossthe property industry, particularly for themore amateur property owners who may onlymanage one or two buildings on a part-timebasis. Again, ignorance is usually the culprit.
Simon Martell agrees that insurance is notprioritised highly enough by companies, andis often seen as a grudge payment: “Insuranceis likely going to be an afterthought, but weneed to make sure that it is not forgotten.
Whatever the recommendation, whatever theguidelines, make sure you’re talking to peoplewho do your valuations or manage yourproperty, and your insurance broker, and getthe best advice so that you are protected. Ifyou’re not doing that, and if it’s forgottenabout, then you’re always going to be at risk.”
To prove how crucial regular re-valuationsare to comprehensive insurance cover, Steven
Rust, Executive Director, Real Estate &Construction, Lockton Companies, reveals:“We’ve got one client who does a regularthree-year rolling programme and thevariations in the re-valuations from just threeyears is incredible – 50% up or down.”
COMMON MISCALCULATIONSOne of the most common discrepancies ininsurance valuations is between the marketvalue of the property and the reinstatementcost. Certainly in today’s economic climate,the market value of a property may beconsiderably less than what it would cost torebuild, and that is an importantconsideration. There are several variablesthat can have an impact on the value of aproperty over a period of time, and theinsurance valuation should be adjustedregularly accordingly. Also, there can be costsincurred during the original construction,such as decontamination of a site orearthworks that would not need to be paidagain if the building was reinstated, whichcould result in an over-valuation. The bestway to have accurate sums insured is tocommission a regulated surveyor to carry outa professional valuation every three to five
Our experience is that the underinsuranceproblem is across all classes. Everything fromdwellings right the way through to huge portfolios…
Martyn Barrett, BCH
If you are expanding yourproperty portfoliooverseas, it is worthnoting that differentcountries can havewildly differentinsuranceprocedures. StevenRust reveals that insome countries,such as Sweden,they do not have whatwe call a Day One Basisof Settlement: “From a UKpoint of view, when you’vegot clients buying assets in
Sweden, you ask for a declaredvalue and they look at you
with a blank face, saying,‘That’s the building. The
insurer will reinstateit.’ In the UK, you haveto first state howmuch it would cost torebuild it.”
In Switzerland, youwould find different
insurers in differentcantons who would set
the sum insured for you,which is at odds to how it is
clarity there. Whether it’s the landlord thatpays for it or the tenant, you know up frontthere’s a cost involved.”
Currently any type of surveyor – providedthey are regulated – can carry out insurance
valuations, and in some companies it is left tomore junior staff, often with insufficientprofessional indemnity cover. Martyn Barrettstresses how risky this is: “The responsibilitythat goes with those few caveated linesadded at the bottom of the open marketvaluation, which somebody might rely upon,is immense. This is a discipline in its ownright. As a minimum the valuer should havesome quantity surveying grasp of what he’slooking at. Many divisions of surveying will
Aviva – The risks of underinsurance
have this as part of their original training butit is not the focus. I don’t think there arecurrently enough professionals with the rightskills to do these reinstatement costassessments, partly because the fees are nothigh and partly because the correct level ofspecific professional indemnity cover can bedaunting. ”
PUTTING IT IN PRINTIn order to raise awareness of the pitfalls andchallenges faced by property owners wheninsuring their buildings, the RICS is publishinga Guidance Note, Reinstatement CostAssessments of Buildings, later this year (seeseparate panel). Martyn Barrett is on the RICSsteering group for the project and explainshow there is an inconsistency in theprofession with regards to insurancevaluations: “Insurance valuation has alwaysbeen the poor relation; it’s often seen as thebit that’s tacked on to the bank loan openmarket valuation. The RICS is currentlyreviewing the entire procedure for providingvaluations for insurance purposes. It’ll be a‘best practice’ note, it will not be mandatory,but what they’re saying is if you do not followthis procedure and you end up in court, thenthe judge will query why you didn’t follow theRICS guidance.”
Also being published later in the autumn isthe RICS’ Property Manager’s Guide toInsurance (see separate panel). Written by anexperienced property insurance broker, butperfectly readable for surveyors, thedocument will help to show where theinsurance obligations lie and simplify much ofthe jargon.
RESIDENTIAL RISKSOne aspect of property insurance whichremains something of a grey area isresidential, particularly large-blockresidential. Steven Rust explains: “You’vealways got the problem of how you valuesome of these prestigious Londonapartments, such as in Kensington andChelsea. You’ve got all the individual tenantsin there, who have taken out the standardkitchens and put in Italian bespoke marble,and hardwood floors. In most cases, nobodyhas ever increased the sum insured to caterfor that. Often, because there’s no landlord assuch, just a freeholder wouldn’t necessarilybe made aware of it and the managementcompany probably isn’t aware of individualrefurbishments. The answer is to get behindas many of the closed doors as possible. If youstart off with a valuation with it all being of a
basic standard, you’ve never had anothervaluation and you’ve index-linked it, you’regoing to be potentially way out on the latestrebuilding costs, and that’s a danger.”
Of course, for landlords, the prospect ofincreasing insurance premiums is not onethey will relish. In recent years, tenants havebecome a lot stronger because there is somuch capacity out there, making landlordsfearful of raising costs. But, as always, it is acase of weighing up the risks.
You’ve always got the problem of how youvalue these prestigious London apartments,where individual tenants have refurbished andnobody has ever increased the sum insured.
Steven Rust, Lockton Companies
With such stark figures suggestingunderinsurance is a prevalent problemin the property industry, you mightexpect to hear about more high-profilecases. However, many insurancepolicies with portfolio-wide coverinclude a waiver. For example, if thesum insured for your portfolio is £1billion and you’re under-insured by £1million on the property you’re claimingfor, but over-insured by £1 million onanother property, then the policy islikely to pay.
Large claims such as these oftenallow for a little movement, says SimonMartell: “I think with any claim, orcertainly any large claim, there’salways going to be an element ofnegotiation on the settlement figureanyway, and the cost of the worksthemselves. Whether there be a waiverin place or not, that negotiation is goingto account for some of that. To support awaiver being in place, we need to seeevidence of the quality of themanagement of the whole portfolio,and we will look at what informationwe’re getting in, the integrity of theinformation and the valuations, and if itis subject to three-yearly valuations.”
well established and benchmarked. Insuranceis another one of the occupational overheads.”Carl suggests that leases would include therequirement of a re-valuation every threeyears, payable in the first instance by thetenant as most leases are drawn with acovenant for the landlord to insure and thetenant to reimburse.
Steven Rust supports this idea: “If you builtinto the lease that re-valuations have to bedone – both when and by whom – then there’s
common practice is that as a deal goes intodue diligence, an insurance policy comesacross from the current incumbent, somebodyhas a look at that and says, ‘Well let’s getterms on that’. So there’s invariably not acheckpoint where anybody seriouslyquestions the expiring terms and conditionsand declared value.”
To go some way to tackling this challenge,he suggests that one solution would be theintroduction of an insurance re-valuationclause in all leases. “I think you need to look atthe way leases are drafted. We’ve got a codeof practice for service charges that has been
Property Manager’s Guide to InsuranceThis guidance note is being written forproperty managers and surveyors whoare involved with the insurance coverrequired by commercial property owners.The note will assist those who areregulated and those who supplyinformation to brokers and others that areresponsible for arranging cover. Propertyowners’ insurance is a unique class ofbusiness that has to reflect the nature ofthe property-owning industry and theinsurance requirements of leases.
Most but not all leases require thelandlord to insure and to be reimbursedby the lessee for the premiums paid. Inconsequence, the insurance programmeis often driven by a demand for all-embracing cover rather than price.Although lessees are paying for this,they do get the benefit of the wide coverand will often benefit from thepurchasing power of the landlord.
Reinstatement Cost Assessments of BuildingsThis guide for surveyors coversprocedures for the assessment of therebuilding cost of non-domesticconstruction. It provides detailedguidance on the manner in whichassessments should be approached, thenature and extent of the information tobe collated, and the manner in whichthis information should be processedand the assessment calculated andpresented.
By publishing this document, RICS aimsto bring uniformity to assessments;improve consistency and reduce the levelof confusion; and demonstrate the levelof professionalism that should be shownby chartered surveyors in carrying outsuch instructions.
Both publications are expected to belaunched inautumn2010.
Carl Whayman sees recoverability as thekey factor here: “From our point of view asoften being the managing agents and broker,we’re particularly keen to ensure thepremium has been market-tested, so that wecan demonstrate to the occupational tenantthat the risk – be it a single let property or aportfolio – has been openly tendered to anappropriate panel of leading insurers, so thatit’s been competitively priced and thepremium is the appropriate premium in the
market at that point in time.”The financial losses that could be brought
about by underinsurance are just the start ofthe disastrous consequences for the propertyowner, as Simon Martell explains: “It’s all partof the validation of the quality of an insured. Ifwe are questioning one of the valuations – ifthere appears to have been underinsurance onclaims coming through – even if it has beendealt with along the way, you start to questionthe quality of that client. Quite often where
there’s one problem, there’s a few connected. Itgets to a point with some clients where youlook to not renew, or decline the risk. Thenthere’s a record of an insurer declining a risk,and that must be declared to any other insurerbefore it’s placed with them.”
So while property owners may be seekingcost-saving measures in these difficult timesor are putting their heads in the sand overtheir property values, it would seem thatunderinsuring just doesn’t pay.
Aviva Insurance UK Limited8 Surrey Street, Norwich NR1 3NG www.aviva.co.uk/yourbusiness
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Climate change is having more and moreimpact on insurance premiums. SteveRust believes flooding is one of thebiggest issues in insurance right now andone that will continue to grow: “It’s notjust the rivers, it’s surface water flooding
as well. There are sophisticated mappingtools available and people need tocarefully look at where a property islocated, not just whether it is by a river,but consider the susceptibility for surfacewater flooding. There are bigger excesses
now, and some areas are becoming a lotharder to insure for flooding withoutvery large excesses, purely because ofthis. With the changing weatherpatterns, I think that’s still an issue goingforward.”
Gypsy and traveller rights: Are we losing the plot?Caravans, cars, mechanical diggers… A Travellers’ camp can appear overnight on vacant land. A small ‘village’ can grow in days. Mark Cosh, European Director of SitexOrbis, dispels some myths about Traveller rights on unauthorised sites, points out the vulnerable plots and highlights measures landlords and developers can take to guard against settlements.
TRAVELLER RIGHTS
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TRAVELLER RIGHTS
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T ravellers grabbed the media’s attention in early 2008 when they pitched up in Shipston-on-Stour, Warwickshire, close by the £1m
country home of Tessa Jowell’s estranged husband. The next day the headlines had moved on. For Mark Cosh, however, the European Director of SitexOrbis, the issue is a full-time job. His firm helps clients to protect their vacant sites.
“Former pub car parks and fields are typical places that Travellers like to target, but all vacant land is vulnerable,” explains Mark. “Travellers even encamp in public parks. In one recent case, they appeared between a park and the highway. It was an area that took some time to find out whether it was the responsibility of the Highways Agency or the local council.
“It’s a countrywide problem, with the favourite time for encampment being at night. Often it’s a case of a few caravans pitching up, those on site waiting a day to check no one is taking any action and then calling up family members and other Travellers to join them. Once settled, unless action is taken, the length of stay varies, although this tends to be longer on fields.”
From 82,000 to 300,000Estimates of the number of Gypsies and Travellers in Britain vary widely, as they are not currently identifiable as a separate ethnic group in the Census. The January 2006 Gypsy and Traveller Caravan Count, carried out by Local Authorities, sheds some light on those living on sites (www.communities.gov.uk/documents/housing/pdf/158454.pdf). Of over 15,500 Gypsy and Traveller caravans in England, 79% were on authorised sites; 14% on unauthorised developments (where Gypsies and Travellers own the land but do not have planning permission); and 7% on unauthorised encampments (where Gypsies and Travellers do not own the land or have planning consent). Although there are later ‘pitch’ counts, detailed breakdowns are hard to find.
SitexOrbis is a 24/7 property and people protection specialist that delivers hands-on expertise in vacant property protection and management throughout Europe. For further details, see www.sitexorbis.com
It’s a countrywide problem, with the favourite time for encampment being at night. Often it’s a case of a few caravans pitching up, those on site waiting a day to check no one is taking any action and then calling up family members and other Travellers to join them. Once settled, unless action is taken, the length of stay varies, although this tends to be longer on fields.”Mark Cosh, European Director, SitexOrbis
What action can be taken? Don’t Travellers have legal rights, akin to squatters? “When Travellers settle on an unauthorised site, despite what they may claim, they have no rights. Squatters’ rights are commonly heard, as if occupying a field or other open space is the same as entering a house through an open window, but these claims don’t hold water. Travellers will also try to enforce planning permission by carrying out building works, such as laying hardcore. They will even try to claim agricultural use to appeal to those who support green issues. We work with solicitors and bailiff partners to best advise our clients on next steps if they are unfortunate enough to be in this position.”
As with most problems, prevention is better than cure, which can involve eviction and clean-up work. “We’ve recently cleared an old car park of calor gas bottles, rubbish and excrement and secured the site using concrete road blockers. The Travellers left every piece of waste imaginable.” The best way to guard against the problem is to secure a vacant site properly. “Installing alarms that can capture video footage proves very effective, as long as they’re monitored 24/7 and, ideally, linked
to an alarm-receiving centre, such as ours. People quickly get the message that the site is being watched around the clock.” Regular inspection of vacant land – ideally weekly – is also recommended. “We provide our clients with frequent site reports, which include photographs. That way, landlords have a record that shows they’re taking precautionary measures, which can be used in any claim or legal procedure.”
Foresight is also invaluable. “Being aware of Travellers’ movements helps enormously. We can step up inspections as needs be and be ready with fencing and other materials. Our local staff work closely with the community and will often hear about an up-and-coming Traveller wedding or funeral, which is bound to bring more Travellers in to the area looking for places to encamp. We’re also aware of which sites are most at risk. If we know the owners, we’ll warn them wherever possible.”
UNDERINSURANCE
We appreciate it can be difficult to accurately assess the sum insured. That’s why we’ve trained our risk advisers to provide guidance to our policyholders on the costs to rebuild smaller properties. Where the size or complexity of the building requires specialist assessment, customers can obtain a professional valuation at preferential rates.” Mark Dunham, Commercial Property Underwriting Manager, Aviva
Avoiding shaky foundations:
How to ensure your property is fully insured“The last time you want to discover that your sum insured is inadequate is when you need to make a claim as you may not receive sufficient money to make good the damage,” says Mark Dunham, Commercial Property Underwriting Manager, Aviva. Should the worse happen, how much would it really cost to reinstate your business investment?
Five pointers
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Make sure you know what is included in the insurance policy definition as this may include a range of ancillary items, such as walls, gates, fences, garages and other outbuildings. These items are frequently forgotten about, but must be taken into consideration when calculating the sum insured.
2
Include the cost of removing debris, as well as architects’ and surveyors’ fees, when calculating the reinstatement figure.
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You may also need to consider other reconstruction expenses, such as site decontamination or demolition of a fire-damaged building.
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Keep up-to-date with current building requirements and local planning criteria, as new demands can significantly increase rebuilding costs. For example, owners are increasingly being required to reinstate properties with improved thermal efficiency or on-site power generation (see the separate article about the green issue in this supplement).
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The best way to obtain an accurate sum insured is by commissioning a regulated surveyor – whose expertise should include quantity surveying – to carry out a professional valuation every three to five years. That way, you will be less at risk of a claim shortfall.
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fIRE RISK ASSESSmENTS
Legal insightFire safety legislation is increasingly concerned with blocks of flats, especially following the tragic death of six people in a fire at Lakanal House, Southwark (July 2009), and subsequent investigations in London, which found that at least 300 social housing high-rises had no valid fire check. Outside of the capital, Stayton Property’s block of over 100 flats in Halifax had to be evacuated after being condemned following a fire risk assessment (BBC Radio 4, ‘Face the Facts: High Rise – Low Safety’).
Commercial landlords must also understand their responsibilities in the context of the lease. The Fire Safety Order applies to any person who has, to any extent, control of a premise. Landlords should make sure that tenants are aware of the Order and co-operate with them to meet the regulations. In multi-occupied buildings, owners may be responsible for common parts of the building. For further guidance, visit: www.london-fire.gov.uk/Frequently AskedQuestions.asp
‘Extinguishing the risk’Dermot Rollins, Joint Chief Executive of Rollins Insurance Brokers, on the take up of fire risk assessment services by clients.
A glance at the news tells you the number of fire safety audits is on the rise, with the fire and rescue authorities determined to crackdown on businesses that break safety laws. Residential and commercial landlords must also take heed.
W e’re here to provide the best possible service to our clients,” says Dermot, “and that includes
highlighting the need for proper fire risk assessments. We’re an independent firm that doesn’t look to ruthlessly maximise revenues from our clients, but to provide a professional advisory service in every way we can.“
So far this year, Rollins Insurance Brokers has recommended Aviva Risk Management Solutions (ARMS) to over 25 clients who have expressed an interest in fire risk assessment services. Many of these clients are golf and social clubs. “I wouldn’t recommend any company I wouldn’t use myself. Aviva may not provide the cheapest service, but why risk it? If my clients use another supplier, I could not be certain what they would be getting for their money. Compare that to a detailed document, professionally presented, from a trusted firm like Aviva, with a solid industry reputation.
“The feedback about the (ARMS) service has been very positive. Clients have been delighted with the thorough, collaborative approach, which avoids going overboard,” adds Dermot. “Even in this tough economic
climate, clients see the value in carrying out a proper assessment at the cost of a few hundred pounds. Consider the alternative: the risk of a fine running to thousands of pounds and the time involved in resolving the matter.
“We’re still finding that there’s a lot of ignorance about the need for fire risk assessments. Aviva has been working with us to get the message out there, with advertisements and articles.”
Rollins Insurance Brokers, established in 1945, is a leading Insurance Broker in Northern Ireland. The firm provides innovative insurance solutions for businesses and individuals. In particular, it has an unrivalled reputation for arranging insurance on behalf of social, golf and other sports clubs and associations. For further information, visit www.rollinsinsurance.co.uk
About ARMS Aviva Risk Management Solutions is one of the UK’s leading providers of health, safety and environmental and business continuity services, with over 20 years experience in these fields. Through brokers, it provides competitively priced fire risk assessments for a range of clients, with no requirement to be insured by Aviva to be eligible for ARMS services. For further information about this service, please go to www.aviva.co.uk/arms
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mETAL THEfT
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Escalating market prices mean rising metal theft
Copper is like gold
It used to be mindless thieves stealing lead from church roofs that got the nation tutting. Now, it is copper piping being ripped out of newly built hospitals. In fact, any empty property – commercial or residential – is open to the serious and growing crime of scrap metal theft. One look at the markets tells you why; metal is an extremely valuable commodity and copper is king, hitting ‘all-time highs’ over recent years and staying there. It is so precious criminals will even chance stealing live electricity cables.
Replacing weighty fixtures is just part of the story; victims often pay a much heavier price putting right the destruction caused by the thieves. Pipes pulled from sites, for example, often cause flooding and costly water damage.
SitexOrbis hears countless tales of the theft of copper pipes from empty properties, especially in the north west of England, when they receive calls to help protect sites. One answer is to install ‘Videofied’ portable intruder alarms, which are extremely cost-effective compared to CCTV solutions. “If the alarm is activated, video footage is immediately transmitted to our trained operators at our response centre, who will summon the police to respond to the break-in and pass on the video evidence,” says Mark Cosh, European Director of SitexOrbis, the UK’s market leader for integrated empty property solutions and people protection. “Increasingly, we’re working in partnership with local police forces, landlords and building and refurbishment contractors to tackle the issue.”
In the past, SitexOrbis has even stripped empty properties of copper piping to stop them becoming a target for thieves. “But, fortunately, technology such as Videofied alarms makes this practice less common today.”
Did you find the first edition of Property View useful? Are there any topics you would like us to cover next time? If so or you have any feedback, please email: [email protected]
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EDITORS LETTER
Aviva Insurance UK Limited Registered in England No 99122. Registered Office 8 Surrey Street, Norwich NR1 3NG Authorised and regulated by the Financial services Authority.XXXXXX AUG 10
