If you have ever filled in a home insurance form, you will have been asked for your rebuild cost. A lot of people pause at that question, glance at what their house is worth on the open market, and put that figure down. It feels reasonable. It is also one of the most common and most expensive mistakes in home insurance.
Here is what rebuild cost actually means, why it is different from market value, and how to arrive at a figure you can rely on.
Market value and rebuild cost are two different things
Market value is what someone would pay to buy your home. It reflects the desirability of the location, the local property market, the size of the garden, nearby schools, and a dozen other factors that have nothing to do with bricks and mortar.
Rebuild cost is the amount it would take to physically reconstruct your home from the ground up if it were destroyed. That includes demolition and site clearance, materials, labour, professional fees for architects and surveyors, and meeting current building regulations.
The two figures are rarely the same. Where land is expensive, the rebuild cost is often lower than the market value, because so much of the purchase price is the land itself. With older, period or unusually constructed properties, the rebuild cost can be higher than the market value, because traditional materials and specialist craftsmanship are costly to replicate. Either way, using one figure in place of the other leaves you exposed.
Why getting it wrong matters so much
If your rebuild figure is too low, you are underinsured. The danger here is something called the average clause, which most policies contain. If an insurer finds that you insured your home for less than the true rebuild cost, they can reduce any claim payout by the same proportion, even for a small partial claim.
To put that in plain terms: if your home should have been insured for £400,000 but you only insured it for £300,000, you have covered 75% of the true value. Make a £20,000 claim, and the insurer may pay only 75% of it, leaving you to find the remaining £5,000. The shortfall applies to every claim, not only a total rebuild.
Insuring for too much is wasteful in a different way. You end up paying a higher premium than you need to for cover you can never actually use, because the insurer will only ever pay the genuine cost of rebuilding. The goal is accuracy, and there are reliable ways to get there.
How to work out a reliable figure
For most standard homes, the simplest route is the BCIS rebuild calculator. BCIS is the Building Cost Information Service, run by the Royal Institution of Chartered Surveyors. The Association of British Insurers provides a free online rebuild cost calculator powered by BCIS data, which you can find through the ABI website. You answer questions about your property’s age, size, construction and features, and it produces an estimated rebuild figure.
This works well for typical houses of standard construction. It is less suitable for certain properties, and that is where a professional valuation comes in. Consider a surveyor’s rebuild assessment if your home is listed or of historic interest, built before about 1920, of non-standard construction such as timber frame, thatch or stone, has been significantly extended, or is a flat where the calculation needs to account for the whole building.
A chartered surveyor can carry out a reinstatement cost assessment and give you a figure tailored to your property. For higher-value or unusual homes, that cost is small set against the risk of being badly underinsured.
Keep the figure up to date
A rebuild cost is not a set-and-forget number. Building material and labour costs have risen considerably in recent years, and your figure can also drift out of date when you make changes to the property, such as a loft conversion, an extension or a new kitchen.
It is worth reviewing your rebuild cost every few years, and always after significant building work. Many insurers apply index linking, which adjusts your sum insured automatically in line with building cost inflation, but that only works if your starting figure was accurate in the first place.
A quick word of advice
Rebuild cost is one of those details that is easy to get wrong and genuinely costly when you do. If you are not confident your figure is right, or you have a property that does not fit the standard mould, it is worth talking it through.
If you would like help reviewing your building’s sum insured ahead of your next renewal, please get in touch.
