Reinstatement cost assessments explainer

Reinstatement Cost Assessments (RCAs) are crucial for property managers to ensure adequate insurance coverage and minimise financial risks in the event of significant property damage or loss.

We hosted a webinar with James Paul, Director at EarlKendrick Group, Nigel Glen, Non-Executive Director of Emeria, and Fixflo's Joe Goss. They discussed the intricacies of RCAs, their importance, and the factors that influence their accuracy.

Hear about what they had to say on Reinstatement Cost Assessments.

What is a Reinstatement Cost Assessment?

A Reinstatement Cost Assessment is a process whereby a property is visited to assess costs incurred if it were to suffer substantial damage, in order to obtain insurance of the correct value.

The final assessment total will be provided following this process, which should include:

the total cost to rebuild,
demolition and debris removal,
and professional and statutory fees.

The declared insurance value will be calculated from these.

What happens during a Reinstatement Cost Assessment?

A qualified surveyor visits the building for an initial assessment, or they do this online with a desk-based survey. During this time, they note the location of the property, its size, and materials. After the first assessment, more information is gathered about the building, such as its unique features and its current condition. Costs are then calculated on how much it would be to rebuild the property.

This takes into consideration:

Location
Materials
Features
Age
Condition
Construction costs
Size
Regulation
Listing status

A final report is submitted, which shows how the qualified surveyor came to the cost.

RCAs are just one of the tasks block managers need to tick off their lists regularly. Discover what else managing agents need to keep a close eye on.

The importance of Reinstatement Cost Assessments

The conversation between James Paul, Nigel Glen and Fixflo's Joe Goss included a discussion of the critical role RCAs have in property management, their implications for property managers, and the factors that influence their accuracy.

Complexity

One of the primary challenges associated with RCAs is the complexity involved in valuing listed buildings. These historic structures often require meticulous preservation of original features, which can significantly increase the cost of rebuilding. The need to replicate historical details, such as intricate stonework, can drive up the cost of reinstatement.

James said: “If you're dealing with a modern block of flats, or even one built 60 years ago in the sort of 1960s or 70s, they're probably not going to be that fussed over the exact nature of the replication. Indeed, modern, sensible upgrades, uPVC double glazing, instead of aluminium single glazing or whatever was there in the 1970s now, no one's going to make a fuss about that. But if we start talking about more historical type things, a grade one listed building—York Minster, or something like that—burning down, you're going to have to go the whole hog. They're going to make you recreate every single gargoyle, probably using proper stone mason and the whole gambit.”

Assessments

Another crucial aspect of RCAs is the choice between desktop and physical assessments. While desktop assessments are more convenient and often less expensive, they may be less accurate due to limitations in data and the inability to physically inspect the property.

Nigel noted that desktop evaluations were cheaper but riskier. This can lead to overinsurance, which is essentially wasting money on premiums. Physical assessments, on the other hand, provide a more comprehensive understanding of the property, ensuring a more accurate valuation.

He said: “This is the issue with desktop RCAs—they are much more of a rough and ready figure. The thinking is you probably won't end up underinsured, but you probably will end up overinsured. If you end up overinsured, you're effectively flushing money down the toilet when it comes to your insurance broker and the premium you're paying because you're insuring a building that maybe would only cost five million pounds to rebuild for perhaps 5.5 million, or maybe even six million. No one really wants to do that if they can have a cheaper insurance policy and insure for a more accurate amount.”

Declared values

The concept of declared values and sums insured is also a key consideration in RCAs. Declared values represent the hypothetical cost of rebuilding on the day of the assessment, while sums insured include a margin for inflation and potential fluctuations.

James added: “The declared value is the hypothetical sum that it would cost to rebuild a given day on the same day that the surveyor went out and assessed it, assuming that all the different construction trades and processes and things could happen all in one day. It's hypothetical nonsense, but imagine you could build an entire house in one day, from digging out the foundations to putting on the door handle of the last front door, and literally, then give someone the keys at five o'clock and walk in. No house gets built like that in reality but that is effectively what a day one declared value is.”

He explained this sum includes some padding, which allows the three-year period of which an RCA is valid to be covered despite inflation.

James added: “Most typical low-rise estate houses will take the best part of a year to be built from start to finish. It's quite normal for a building in a real-life reinstatement scenario to be completed and finished maybe three years after it originally burned down and perhaps six years after the last RCA was conducted for the old building before it burned down. You may be looking at five or six years' worth of inflation there. That's why you often have declared values for, let's say, five million pounds and sums insured for, let's say, six million. It's often done by the insurance broker using a round number percentage uplift, like 30%, 25% or 50% whatever. And the broker agrees with the policyholder and says, what kind of inflation provision do you want?”

Disrepair

The state of disrepair of a building can also influence the cost of reinstatement. While RCAs generally ignore dilapidation, a depreciated RCA can be used for severely dilapidated properties. This allows for a deduction of the cost of repairs from the overall rebuild value.

What does this mean?

RCAs are indispensable tools for property managers. The complexities involved in calculating RCAs, particularly for listed buildings and mixed-use properties, underscore the importance of professional expertise. By understanding the factors that influence RCAs and regularly updating assessments, property managers can make informed decisions to protect their assets and mitigate potential losses.

Joe commented that property managers using Fixflo can auto-schedule instructions to their preferred surveyor using Fixflo's compliance manager. This means they'll never forget to book the RCA for when it's due.

Reinstatement cost assessments

explainer guide

What is a Reinstatement Cost Assessment?

How often should you have a Reinstatement Cost Assessment?

What happens during a Reinstatement Cost Assessment?