Trustees must avoid the potential pitfalls of inaccurate valuations, says Alan Dunn, Director, Rossborough
09 Sep 2013
Ensuring large and valuable assets are adequately insured remains extremely important, yet many trustees are not taking the appropriate measures to guarantee that an asset's true worth is accurately reflected in the insurance policy.
With markets in a constant state of flux, it is imperative that trustees successfully safeguard their 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. Under or over valuing an item of jewellery or a property can cause significant issues for a trustee.
Research carried out by Aviva[i] in 2009 found that 86% of properties surveyed were underinsured. Trustees must be aware that estates risk significant financial loss if properties are under valued.
Prudent trustees will ensure that a detailed property valuation is conducted. This valuation would be different to the one employed for standard open market sales. It would consider improvements that may have increased the rebuild value of the property so that, in any event of damage, 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 and 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 that funds will not be immediately available to allow properties to be reinstated. In some circumstances 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. Whilst 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 marketplace and to avoid pitfalls that will potentially devalue a trust portfolio. Insurance brokers can often assist in obtaining a cost effective valuation solution.
Similar issues affect insurance of jewellery. Experts believe the need for accurate jewellery valuations is greater than ever. Significant fluctuations in the past five years have led to some jewellery insurance valuations being potentially too low and, in some cases, too high.[ii] 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 on an upward trend due to supply and demand. The price of premium watch brands also continues to increase steadily. An increase in value of jewellery with larger carat diamonds is expected in the near future due to a lull in mining during the recessionary period.
Trust advisors must consider that, in the event of a lost item of jewellery or watch, 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 need to replace the item should arise. This valuation will take into account any special features that the item has, for example its carat weight, 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 to seek professional advice to ensure that the insurance policy is appropriate and that the insured values are adequate so they do not discover a property or significant jewellery item does not have satisfactory insurance cover in the event of a claim.