Although you are under no legal obligation to insure the property that you are letting out or any contents inside it that belong to you, surely you must agree that it would be a sensible thing to do? You have, after all, no doubt invested a significant sum of money in your lettings business.
Assuming that we are agreed on that, the next thing to consider is how much to insure the building and any contents of yours that are inside it for. This is an important thing to decide upon as, if you were believed to have under-insured the let property or the contents it could have serious financial implications that we will come on to later.
So, how do you go about making sure that the building is insured for the correct sum of money? Well, if you purchased the property with the assistance of a buy-to-let mortgage, the lender will have insisted on the property being valued. The valuer will have provided an estimate of the re-building cost of the property should it need to be completely re-built perhaps having been destroyed in a fire. That figure is likely to be lower than the price you paid for the property. If you paid cash for the property, you will no doubt have had it valued and that valuer should be able to say what the re-building cost is likely to be. The property should be insured for at least the re-building cost.
With regards to the contents, the first thing to remember is that we are only talking about the contents you own – not the tenants’ contents. You should go around each room and list all the contents such as beds, chairs and washing machine giving each one a value based upon the cost of buying them brand new. This will give you the figure that the contents should be insured for.
Let’s assume that the building should be insured for £150,000 and the contents for £15,000.
Now, sensibly you decided to arrange landlords insurance but, for some un-known reason, perhaps because you think you can save some money by paying a lower premium, you decide to insure the building for only £75,000 and the contents for £7,500. So, what you have done is arrange insurance cover for only half of the amounts these things should have been insured for.
Unfortunately, by under-insuring the building and contents you have potentially placed yourself in a difficult financial situation should you need to make a claim. Let us assume that there is a fire at the let property and it is burnt to the ground and all the contents are destroyed.
You will only be covered for 50% of the “true value at risk”. So, if it actually costs £150,000 to re-build the property you would be able to claim £75,000 and if it cost £15,000 to replace the contents you would be covered for £7,500.
So, yes, you have got what you paid for but where are you going to find the £82,500 to cover the shortfall in the total cost? Wouldn’t it have been better to insure these items for the correct sums even if it did mean paying a little more each month?