The buildings sum insured figure that appears on your home insurance refers to the maximum amount of money that your insurer would be willing to pay to rebuild your home in the event of it being badly damaged, or destroyed altogether.
Importantly, the sum insured is NOT the price that you paid for the home, neither is it the current market value.
A sum insured does not just cover the cost to rebuild a property in line with current Building Regulations and other statutory legislation; it also includes the cost to demolish and clear away the damaged structure, together with associated professional and local authority fees.
How to work out the buildings sum insured?
A mortgage survey or home valuation report will show your buildings sum insured total. It is the responsibility of the insured party to ensure the sum is correct, so it is important to check, should there be any doubt.
Domestic buildings insurance policies are generally index-linked, and the House Rebuilding Cost Index is widely used for index linking the sum insured between annual policy revisions, and for updating the sum insured from one year to the next as the policy is renewed.
However, the Building Cost Information Service (BCIS) recommends that the rebuilding cost is checked at least every five years, rather than relying on index linking over long periods. Because the index is based on an average of house types, it cannot precisely reflect changes across all rates from the house rebuilding cost tables, because regional trends and labour and materials costs vary significantly.
Construction costs on the increase
On the subject of trends, there are some very important ones happening in the world of construction pricing currently.
There has been a great deal of media coverage throughout the national press concerning the cost of construction materials increasing to their highest levels for many years. Specific materials have seen considerable rises. Timber for example has proved a problem across the globe, with a report in The Guardian stating that timber has increased in price by more than 80 per cent in the past six months. Paints and varnishes have also seen a price increase of more than a third, and roofing materials supply issues have seen knock-on price rises of over 15 per cent.
The latest data from the Office for National Statistics (ONS), published by the Department for Business, Energy and Industrial Strategy for June 2021, reveals that the cost of construction materials year on year increased by 14.7 per cent.
Mostly, the increase in materials costs has been down to demand outstripping supply during the pandemic, although there is little sign of the trend diminishing any time soon. Labour costs have also increased, due in part to COVID, but also exacerbated by Brexit, as well as a shortage of skilled trades and logistics operatives.
All of this brings concerns to the surface of ensuring that sums insured are maintained at a level that will cover the considerable inflationary challenges that are currently being experienced.
How do the current construction costs trends affect insurance?
Whilst most home insurance policies state that they will track the House Rebuilding Cost Index prepared by the Association of British Insurers (ABI), some insurers are electing to temporarily adjust the index upwards, with a view to increasing the protection afforded to policyholders during this volatile time and the potential that it brings for increased claims costs.
It is also important to bear in mind that home renovations, the likes of which have been commonplace during the pandemic sparked by people spending more time at home, have the potential to influence replacement costs, which could render a sum insured insufficient.
What’s more, changing construction sector legislation, with greater focus on safety standards, could further increase rebuild costs, in particular in terms of professional consultancy fees. Environmental considerations and a desire to opt for eco-friendly materials, often more expensive, as well as the presence of complex, smart home setups, all have their role to play in amplifying rebuild costs too.
Is your sum insured sufficient to cover your rebuild costs?
In light of the latest news and trends, it is important to take time to ensure your buildings sum insured is sufficient to cover the realistic rebuild costs of your property.
Remember that whilst insurers are adjusting their indexes, this is only ever an average and relies on the original Declared Value being correct. If you did not provide an accurate value in the first place, you could be underinsured despite index rises.
There is a useful guide to calculating your rebuild cost on the ABI website. It is advisable to consider obtaining a professional revaluation of your property via a RICS qualified surveyor if you are to be certain that your sum insured is sufficient.
Our insurers will continue to track inflationary needs going forward to ensure the correct levels are applied for your protection. Should you have any concerns regarding your buildings sum insured, you are welcome to get in touch with your regular contact here at Robert Gerrard.