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A Recipe for Financial Disaster

In the months leading up to June, with the uncertainty of the impending hurricane season, now is a good time to make sure that your home or business premises are insured sufficiently, against not only hurricanes, but also against other perils such as earthquakes and fire.

True, the British Virgin Islands has not been effectively flattened by a hurricane for over 20 years; however, with the passing of Hurricane Earl last year, we need to be reminded that the BVI is susceptible to extreme weather conditions. Equally, our neighbours in the USVI stand dangerously close to harm's way.

On an even greater scale, the recent earthquake in Haiti not only resulted in tragic loss of life but also caused untold damage to buildings, very few of which are likely to have been insured. In July 2009, BCQS International went on a voluntary mission to Haiti, sponsored by the Royal Institution of Chartered Surveyors, and found that the implementation of building codes was woefully lacking. Not only were they insufficient, but there was very little evidence of the enforcement of any building codes at all. Unfortunately, the devastating earthquake struck before any such codes could be put in place. There is, however, no question that robust and properly enforced building codes could have saved a lot of lives and kept people in their homes. Furthermore, proper insurance of these homes and buildings could have helped the rebuilding of Port-Au-Prince. Instead, Haiti is forced to rely upon international aid, partly due to the pre-existing economic situation and partly due to the massive scale of the disaster.

Damage caused to individual buildings as a result of earthquakes or hurricanes here in the Virgin Islands is unlikely to be the subject of such massive aid, therefore owners here need to protect themselves and make sure that the full reinstatement cost of their building is reflected in their insurance policy. The failure to cover this full amount is known as underinsurance.

Underinsurance is when a building is insured for a lesser amount than the current rebuilding cost, this in turn means that the insurance premium paid is not representative of the actual risk, nor is it sufficiently contributing to the insurance premium pool used to help pay for losses. This may save a building owner money in the short-term, in terms of the payment of a lesser premium as a percentage against an artificially low amount, but even the lesser amount that is paid may be wasted money should a claim become necessary.Underinsured properties are subject to the insurance industry’s Condition of Average Clause which, in essence, reduces the claim, according to the percentage of underinsurance and relative to rebuilding costs.

To keep the math simple, let’s say you decide to demonstrate an example, if a building is insured for 50% of the rebuilding cost, the maximum of any claim made will be 50% of the insured amount, meaning that the owner will be unable to finance the rebuilding of their home or business premises. This is exacerbated by any deductable being taken from the 50% the owner receives.

As is often the case, owners do not necessarily know that they are underinsured until they make a claim. This is usually because they are relying upon out-of-date information or are not getting the right advice regarding the value of their property. In 2008 for example, the island of Grand Turk in the Turks and Caicos Islands suffered 85% damage to its buildings, the majority of which were either underinsured, or in many cases, not insured at all. This not only left people effectively homeless and left businesses without premises, but it also left people unable to service the very loans against which the enjoyment of their property or the income generated from it was relied upon to repay that debt.


The best way to avoid underinsurance is to have a property appraisal carried out every two to three years and to insure for the rebuilding cost as appraised. Between appraisals, sums insured can be increased by an inflation factor which should form part of the property appraisal. Adjustments should also be made for any improvements made to the property.

The appraiser would calculate a rebuild value based on a current day construction cost to replace the building like for like. Such a calculation requires a full site inspection and a measure of the size of the building. Experience of construction costs within the particular jurisdiction is fundamental, as well as experience of the vagaries of types of building use, and any structural or architectural nuances. The resultant sum would include not only the rebuild value, but an allowance for the demolition and removal of any remaining damaged structure, as well as an allowance for the professional fees required for the rebuild, such as the costs of appointing an engineer, an architect and a quantity surveyor. Such valuations generally do not include any loose furniture or other unfixed contents.

As we have seen, the onus for insuring one’s property correctly is on the owner, and not as one may suspect, on their insurance company, nor on their lending institution. As previously mentioned, a diligent financier would demand that any loan against their security, (which is usually the subject of the loan itself, i.e. the property), is covered by adequate insurance for the full cost of reinstatement. However, in the event of an unleveraged property, it is often the choice of the individual owner, as to whether their property, and therefore their financial security remain at risk. We would recommend that the individual follow the lead of the Funding Institutions and protect themselves with adequate insurance, rather than carry the risk of the possibility of financial loss in the future. 

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