If your property was to be completely wiped out due to a fire or some other disaster, could you safely say your buildings insurance would sufficiently cover you for the full reinstatement and rebuild costs?
The importance of getting it right when it comes to buildings reinstatement value cannot be over-emphasised. Yet it is one of the most common errors made when insuring a building.
Many people mistakenly assume that the reinstatement value, also known as the ‘Declared Value’ or rebuild value, is the same as the purchase price or current market value of a property. However, this is by no means the case and the market price should certainly not be considered a basis for calculating the reinstatement value. So, what should?
What does Reinstatement Value Mean?
The reinstatement value relates specifically to the property and the cost of its rebuild from scratch. It considers the size of the building, what it’s made from, permanent fixtures and fittings, special features, the quality of the finish and the location, amongst other factors.
Other, very important considerations are included in the reinstatement value. Expenses such as debris removal and site clearance and professional fees for architects and surveyors must be factored into the rebuild costs.
Fail to get the reinstatement value right and you could face a reduced payout should you make a claim. If you are underinsured, the majority of insurers will only pay out a proportion of the total rebuild cost and this will be connected to the amount by which you are underinsured. Say for example you insure your property at a rebuild value of £250,000, but in actual fact the cost to rebuild is £500,000. The most the insurer is likely to pay out is 50 per cent of any buildings claim.
Because the cost of a premium is often linked to the Declared Value, many people opt to declare a lower rebuild cost than would be realistic in order to drive outgoings down. But it is clear to see that this is a false economy.
So, how to calculate the correct reinstatement value?
How to Calculate the Reinstatement Value
There are a few ways in which you can calculate the reinstatement cost for your property, although only one of them will be 100 per cent accurate.
For home owners, one option is to use the Building Cost Information Service (BCIS) calculator. BCIS is part of the Royal Institution of Chartered Surveyors (RICS) and offers a range of detailed guidance on the cost of rebuilding properties.
Another option is to obtain the reinstatement value from a recent mortgage offer: most lenders will state the insurance level for the building they are lending on.
For a completely fool proof calculation however, the best option is to engage a buildings surveyor. They will visit the property and conduct a detailed inspection, arriving at a precise reinstatement value which can be professionally relied upon.
Once you have your reinstatement value, it is important make a point of reviewing it regularly. Remember that rebuild costs will rise over time as inflation drives materials and labour upwards.
Declared Value and Sum Insured: What’s the Difference?
You will no doubt have seen the term, ‘Sum Insured’ on your buildings insurance policy together with the Declared Value. The difference between these two figures is related to inflation.
The Declared Value should represent the full reinstatement value for insurance purposes at the start date of the Period of Insurance.
The Sum Insured is the Declared Value plus an inflation provision of usually between 15 per cent and 50 per cent and is designed to cover the effects of inflation.
This is particularly important in times of high inflation and provides cover for a rise in costs in things like planning, designing and construction (including labour and materials), all of which may be subject to inflation based price rises over and above those that formed the basis of the calculation of the original reinstatement value.
When arranging buildings insurance, either for your home or commercial premises, it is crucial to ensure you have an accurate Declared Value. Ascertaining this value calls for expert knowledge, so here at Robert Gerrard we always recommend our clients arrange a professional valuation from a qualified surveyor.
As well as providing you with peace of mind that your Declared Value is correct, it should assist in expediting settlement of any claim thanks to the professional evidence available to prove the value of the building. Furthermore, from time to time a professional valuation may even reveal that you have over-insured for rebuild purposes, which means you could end up making savings on your premium.
If you would like a quotation for buildings insurance that is tailored to your specific needs, we’d be delighted to assist so please get in touch.