UK homeowners are being warned they could be significantly underinsured, a situation that could lead to substantial financial strain if their property ever needs to be rebuilt following a catastrophic event. The rebuild cost, a crucial figure in home insurance policies, often differs significantly from a property's market value, yet many homeowners may not have reviewed this figure in years, potentially leaving them exposed to unexpected expenses.
The rebuild cost covers the expense of demolishing and clearing debris, along with the subsequent cost of materials and labour to reconstruct a property to its original specification. This figure is distinct from the property's market value, which includes the land value and other factors not relevant to rebuilding. With recent inflationary pressures on building materials and labour, a rebuild cost calculated even a few years ago may now be woefully inadequate to cover current construction expenses.
Industry experts suggest that a common pitfall for homeowners is assuming their policy's sum insured is sufficient because it matches or exceeds their property's purchase price or current market value. However, the market value can be considerably higher than the rebuild cost, particularly in areas with high land values, or, conversely, the rebuild cost could exceed the market value for unique or older properties requiring specialist construction methods.
Failing to insure for the correct rebuild cost can result in 'average' clauses being applied by insurers. This means that if a property is found to be underinsured, the insurer may only pay out a proportion of the claim, even for partial damage. For instance, if a property's rebuild cost is calculated at £300,000 but only insured for £200,000, the homeowner is 33% underinsured. In the event of a £50,000 claim for damage, the insurer might only pay out £33,500, leaving the homeowner to cover the remaining £16,500.
To avoid this precarious situation, homeowners are strongly advised to regularly review their rebuild cost. Professional surveyors can provide an accurate valuation, or the Royal Institution of Chartered Surveyors (RICS) offers a free online rebuild cost calculator, which can provide a useful estimate. It is important to remember that any significant home improvements, such as extensions or loft conversions, will also alter the rebuild cost and should prompt a policy review.
Under UK consumer law, insurance providers must act fairly, but the onus remains on the policyholder to provide accurate information. Ensuring your rebuild cost is correct is a proactive step that can save considerable stress and financial hardship should the worst happen. Homeowners should contact their insurer directly to discuss and update their sum insured if they discover their current cover is insufficient.
Source: Royal Institution of Chartered Surveyors (RICS)