What is index linking and is it a necessary investment for landlords?
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In these economically volatile times, with the cost of utility bills and everyday items changing rapidly, an insurance policy that applies index linking could be a valuable investment for landlords.
As labour and material costs could continue to rise, we’ve answered some commonly asked questions about index linking.
What is index linking?
Index linking is the process used by insurers to help ensure the sum insured by a policy is enough to cover the property’s rebuild value.
Index linking means that the sum insured will be adjusted, factoring in certain financial changes. This can include building costs and other expenses associated with rebuilding a property.
Policies such as our Landlord Insurance can offer monthly index linking, with the sum insured adjusted accordingly. In the case of our policy, no premium is charged for such increases during the period of insurance. The renewal price we quote will then reflect any changes.
How does index linking work?
Index linking in an insurance policy means the insured amount is adjusted depending on changes to rebuild costs. It can be based on a range of costs, such as raw materials, labour, demolition, waste removal, and services fees.
What are the benefits of index linking?
Without index linking, policyholders might be at risk of underinsurance. This is when the rebuild or replacement cost of a building is more than the amount cover by the policy.
If a property is underinsured when a claim is made, the policyholder may be subject to an Average Clause. Under this clause, an insurer may reduce the amount a policyholder claims by the same proportion as the amount of underinsurance.
Where does the index data come from?
The BCIS House Rebuilding Cost Index is used by many insurers. It provides surveyors, property owners, and insurance services guidance for the changing costs associated with rebuilding properties.
What does ‘sum insured’ mean?
The sum insured is the amount an insurer can pay to the policyholder for the costs of an insured event.
To help avoid underinsurance, check the building sum insured is enough to cover the rebuild value if the worst were to happen.
What is a rebuild value?
Rebuild value takes into account costs such as building materials and labour to provide a building sum insured amount. It’s not the same as market value – the cost of rebuilding could be higher than a property’s market value.
Comprehensive cover that includes index linking
Our comprehensive Landlord Insurance provides index linking as standard. It indexes your building sum insured each month, in line with The House Rebuilding Cost index issued by RICS.
Also, we don’t charge a premium for any monthly increase. At each renewal of a policy we will calculate the premium using the new sum insured. For your added protection, should the index decrease, the sum insured will never be reduced.
You can get a quote for our Landlord Insurance using our online form.
The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited trading as Just Landlords accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein. FP1383-2022
