HOUSE INSURANCE CHANGES THAT AFFECT TRUSTS
One of the largest value assets most people hold is their home. Trusts are no exception to this. Frequently, the biggest asset a trust holds is the family home and bach the beneficiaries live in. Trustees have lots of legal duties they must satisfy and one of them is to adequately insure the assets held in the trust under their stewardship.
Historically, when insuring a home or other dwelling, insurance policies for full replacement cover have been taken out. If the home was completely destroyed by fire, a claim would be made. Assuming the insurer met that claim, a new home would be built, to the same size and specifications as the previous one with no limit on the amount the insurer would pay.
Progressively since the beginning of 2013, the insurance regime has undergone a change and now, homes and other dwellings must be insured up to a dollar value, i.e. a sum insured. Under this new type of policy, if a home is destroyed and a claim is made by the policy owner and met by an insurer, the maximum amount of money the insurer will spend on the home is the sum it has been insured for.
Two particular issues have arisen in relation to this new insurance regime. As a trustee you need to be aware of these.
ISSUE ONE – SUM INSURED
Now when taking out new insurance policies or renewing existing policies, you must choose and stipulate what the sum insured actually is. The sum insured is the cost to rebuild the home, to the same size, with similar materials. Calculating the sum insured can be a difficult exercise. To assist, many insurers are offering online tools and applications to help you work out how much it will cost to rebuild the home and therefore, the amount you should consider insuring the home for.
As a trustee, you must be cognizant of the fact that on line calculators and tools offer only an indication of a total rebuilding cost and thus, only an indicative answer to what sum the home should be insured for. Homes, for example, that have undergone improvements, renovations, additions, that have special features, that would need engineering works, that are of a high quality, etc., may not be adequately assessed simply by using an on line insurance calculator because the cost to rebuild these homes may not be accurately estimated by the online calculator utilised.
Some trustees have recently asked me if they can use either their rates valuation or a valuation obtained for bank borrowing purposes to make the decision as to what sum they should insure for. In this respect, it is important to note that neither type of valuation is appropriate to use, as valuations of this type do not calculate what the cost to rebuild the actual dwelling itself is.
A way to ensure that an adequate sum insured amount is calculated is to use either a registered quantity surveyor or an independent valuer. Both professionals will be able to suggest a sum that it would cost to rebuild the home they are reviewing, in the case where a rebuild is required. This suggested sum can then be used to obtain a sum insured insurance policy.
ISSUE TWO – KEEPING EVIDENCE OF CALCULATION OF SUM INSURED
It is important for trustees to keep records that demonstrate they have (a) thought about this issue and (b) the steps they have taken to calculate the sum insured.
Irrespective of whether an online calculator, registered quantity surveyor or valuer is used to assist in the calculation of the sum insured, copies of documents that evidence the basis of the calculation should be kept together with a copy of the insurance policy itself, the invoice for the premium and the receipt showing payment. These documents should be kept with other trust records, including trustee resolutions noting the actions trustees have taken in regards to choosing a sum insured insurance policy.
Frequently, individuals under-insure assets. If this is the case and a disaster happens, the costs a trust can incur to rebuild a home may not be fully met by their insurance policy. This can result in adverse financial consequences being suffered. Accordingly, it is imperative that trustees take the time to understand the new insurance regime and accurately calculate the sum insured so as to protect what is likely to be one of the biggest value assets their trust holds.
In particular, trustees need to take the following steps:
1. Consider what is an appropriate sum insured for the home they hold in the trust;
2. Advise the insurer of the sum insured that the insurance policy should be in respect of;
3. Keep copies of the documents we have mentioned above, in particular those that show the calculation of the sum insured chosen; and
4. Pass trustee resolutions, signed by all trustees including the professional trustee, noting actions taken in respect of the above.
For the trusts that we are a professional trustee
of, we have taken the time to write to our co-trustees and tell them the above.
Should you wish to discuss this issue or if you need assistance in regards to the above steps, please contact us
; we'd be happy to help you.