You’re taking out your insurance policy for your home and come to the Rebuild Value question. The last valuation of your property estimated a sale price of £195,000 so this must be about right… right?
This is the market value of your property and may be vastly different from the rebuild value. Getting this wrong on your insurance policy could lead to complications should you ever need to make a claim.
The Market Value
Various factors are considered when determining the market value of a property and some of these are external to the building itself. The market value most often considers:
- The price of other properties in the area
- Potential buyers
So, what is the Rebuild Value?
The rebuild value of your property is made up of the cost of materials and labour involved to rebuild your house should you suffer a full loss from an incident, such as fire or flooding. Also included in this figure should be costs of the plumbing, electrics, and demolition and clearing of the old property.
Without prior knowledge of building material costs, local labour costs and the process involved in building a property from scratch, providing an accurate rebuild value may seem like an impossible task.
As a homeowner you can roughly estimate the rebuild value of your property using the online BCIS residential rebuilding cost calculator here. However, it is recommended that you use the services of a chartered surveyor qualified to provide you with an accurate value. You can find a chartered surveyor in your area through the Royal Institute of Chartered Surveyors website here.
Am I Underinsured?
If the rebuild value stated on your insurance policy is lower than the actual rebuild value of your property, you will be underinsured. But what does this actually mean?
Insurers benefit from the “law of large numbers”, meaning each year they rely on a large number of customers paying an insurance premium into a pool. This pool then covers the cost of claims for the unfortunate few who suffer damage to their property in that year.
Policy premiums are determined based on this pool of customers, therefore, if you understate the rebuild value, your premium would be too low for your property, leaving you underinsured.
Should you then need to make a claim on your building’s policy, your settlement value will be impacted. In these instances, insurers can apply the pro rata condition of average. This is where the maths comes in!
If the rebuild value on your policy is 50% less than the actual rebuild value of your property, the insurer will likely only pay 50% of your claim value. This means if the damage to your property costs £10,000 to reinstate, your insurer will contribute only £5,000 of the cost, leaving you to foot the remaining bill.
Building Cost Inflation
Brexit along with the Covid-19 pandemic has resulted in construction material costs rising and reaching a 40-year high. Increased global demand in the construction sector, combined with the multiple and complex impacts of the pandemic and logistic issues, have resulted in unprecedented shortages, delays and ultimately, increased prices of materials and labour across the economy.
Building cost inflation matters because, unless the cost of rebuilding your property is regularly and accurately assessed, you can risk being underinsured.
Check your Policy
If you are worried about underinsurance, check the rebuild value of your property. If you have one, speak with your insurance broker who will be able to provide further advice.