The sum insured in decennial insurance

What is the sum insured of decennial insurance?

The sum insured is the compensation commitment the insurer takes on for the whole period of cover of the decennial insurance. It should therefore reflect the real value of the insured works as accurately as possible.

It is the limit of the guarantee for the entire ten-year period and for all the losses the building may suffer, not a limit per claim. Each compensation payment gradually uses up that amount.

The policyholder notifies the final sum insured at the handover of the works, by means of a sufficiently itemised declaration of the value of the insured property, which becomes part of the policy. This step is explained in the guide to how decennial insurance is arranged.

Which items does the sum insured include?

As a basis, the sum insured must include:

• The final material execution cost of the works.
• The technical fees for the design, the site management team and the Technical Control Body (OCT), which as a rough guide are usually between 5% and 10% of the material execution cost.

By express agreement with the insurer, the sum insured can be extended to include other items:

• Overheads and contractor’s profit (rough estimate: 19%).
• VAT (21%, or 10% for some types of works).
• Professional association approval fees (visados).
• Licences and other taxes (roughly between 5% and 7%).

As a reference, all the items added to the final material execution cost can amount to between 45% and 50% of that cost. These figures are for guidance only: each project and each insurer has its own criteria.

Some items never form part of the sum insured: extra costs agreed by the owner for faster execution are not included, and penalties for delays are not deducted.

Can you insure only the minimum required by the LOE?

Yes. The Building Regulation Act (LOE) sets the minimum as the final material execution cost plus professional fees, so the insurer may accept a sum insured limited to those two items.

In that case, the policy must expressly state the items that remain uninsured. Those items will not give rise to compensation if a loss occurs, so the decision should be weighed carefully: a lower sum insured makes the premium cheaper, but it also limits what will be paid out. The guide to the price of decennial insurance explains how the sum insured affects the premium.

What happens to the sum insured after a claim?

When a loss occurs, the sum insured is automatically reduced by the amount of the repair or compensation paid, including, where applicable, the excess applied.

That sum can be reinstated, that is, restored to its previous amount. This can be requested by the policyholder, the insured or any other person with an interest in the preservation of the building. Reinstatement is formalised by means of an endorsement to the policy, on the conditions set out in it, after the insurer has examined the case and given its approval. The insurer may require a report from the Technical Control Body for this purpose.

Demolition and debris removal costs

In addition to the main sum insured, the policy may include an additional sum for demolition and debris removal costs: demolition, removal of debris from the damaged part of the building and its transport to the nearest landfill site.

This additional sum is limited to the amount agreed in the Specific Conditions, which is usually 10% of the amount payable under the basic cover. An extension of these costs by a further 10% of the amount of the loss under the basic cover can also be negotiated. This and other types of cover are described in the guide to decennial insurance cover.

Automatic indexation of the sum insured

Ten years is a long time, and the cost of repairing a building may rise over that period. To prevent the sum insured from falling short, automatic indexation can be taken out as additional cover, in exchange for the corresponding additional premium.

With this cover, from the date of handover of the works, the sum insured increases each year by the percentage agreed with the insurer, in geometric progression (each increase is calculated on the already indexed sum). As a reference, it is agreed on the basis of the Consumer Price Index (CPI), with a cap that usually ranges between 3.5% and 5% a year.

The same percentage and the same progression also apply to the excess set in the policy.

How is compensation calculated? The condition of average

Compensation can never exceed the value of the insured works on the date of the loss. To calculate it, the building is valued at market prices on that date, following the same criteria as the specification of materials and the budget of the original design. That value is then compared with the indexed sum insured:

• If the indexed sum insured is lower than the value of the building, the condition of average applies: compensation is reduced by multiplying the assessed damage by the ratio between the indexed sum insured and the value of the building.
• If the indexed sum insured is equal to or higher than the value of the building, the insurer pays for the damage actually caused.

For example, if the indexed sum insured only covers 80% of the value of the building on the date of the loss, the insurer will pay 80% of the assessed damage. That is why it is so important to declare a sum insured that reflects the reality of the works and to consider automatic indexation.

Key points for setting the sum insured correctly

• Start from the actual final material execution cost, not the initial budget, because the final declaration is made at the handover of the works.
• Make a conscious decision about which additional items to insure and check that the policy reflects those left out.
• Take into account demolition and debris removal costs, which are insured as an additional sum with their own limit.
• Consider automatic indexation so that the cover does not lose value over the ten years.

At Seguróx we review the items making up the sum insured with each client so that the policy covers what the works need, without underinsurance that would reduce the compensation.