Making sure large and valuable assets are adequately insured is extremely important, yet many trustees are not taking appropriate measures to guarantee that an asset’s true worth is accurately reflected in the insurance policy.
With markets in constant flux, it is imperative that trustees safeguard clients’ assets. Property and jewellery often form significant parts of a trust portfolio and both are subject to market pressures and changes that affect their value. Undervaluing or overvaluing an item of jewellery or a property can cause significant problems for a trustee.
Research by Aviva in March 20091 found that 86 per cent of properties surveyed were underinsured. Trustees must be aware that estates risk financial loss if properties are undervalued.
Prudent trustees will ensure a detailed property valuation is conducted. This valuation would differ from the one employed for standard open-market sales. It would consider improvements that may have increased the rebuild value of the property so that, if damaged, the property can be reinstated to its true value and original state. One of the most common discrepancies in insurance valuations is between the market value of the property and the reinstatement cost; these can vary considerably. Reinstatement must encompass site clearance, architect and surveyor fees, plus the inflationary costs during the insurance period and rebuild.
Failure to insure a property on the correct basis could have serious repercussions for the trustee. It may reduce claim settlements, meaning funds will not immediately be available to allow properties to be reinstated. This can result in uninsured loss of rental income. Ultimately, a trustee does not want to be exposed for the failure in their duty to insure a property on the correct basis; while the cost of insurance is an important consideration, it should not be the primary focus.
A rebuilding valuation should be established on a recommended three- to five-year basis to reflect fluctuations in the market and to avoid potentially devaluing a trust portfolio. Insurance brokers can often assist in obtaining a cost-effective valuation.
Similar issues affect insurance of jewellery. Experts believe the need for accurate jewellery valuations is greater than ever. Fluctuations in the past five years have led to some jewellery insurance valuations being too low and others too high.2 For example, in 2007 and 2008 the price of diamonds, gold and platinum experienced some of the highest-ever recorded increases. Although this was followed by a significant price correction in 2009 and 2010, replacement costs have been increasing due to supply and demand. The price of premium watch brands also continues to grow steadily. An increase in the value of jewellery with larger carat diamonds is expected in the near future, due to a lull in mining during the recession.
Trust advisors must consider that, if a watch or item of jewellery is lost, the insurance value on a policy must be accurate or a jeweller will be unable to replace the item with metals or precious stones of equal quality. Arranging a professional valuation of items every three to five years will help to prevent the owners from losing value if the item needs to be replaced. This valuation will take into account any special features of the item, for example its carat weight, its grading and if it is from a particular jewellery house.
It is already the trustee’s duty to ensure assets are protected and insured adequately. Arranging basic insurance may not go far enough to discharge that duty. Trustees need professional advice to ensure that the insurance is appropriate and that the insured values are adequate, so they do not find that a property or piece of jewellery lacks enough insurance cover in the event of a claim.
- 1. www.aviva.co.uk/media-centre/story/17598/underinsurance-is-a-problem-in-the-uk-property-mar
- 2. Gurr Johns, ‘Jewellery Undervaluation’, November 2012
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