Bought For £700,000. Rebuild Cost £1.8 Million: Why Homeowners, Landlords And Commercial Property Owners Can Be Underinsured
Imagine discovering that the property you bought for £700,000 would actually cost £1.8 million to rebuild after a fire, flood or major structural loss.
It sounds unlikely, but situations like this are more common than many homeowners and property owners realise.
One of the biggest causes of the modern underinsurance risk is the assumption that a property's purchase price, market value or mortgage valuation reflects the rebuild cost. In reality, these figures bear no relation to each other.
The purchase price is simply the amount someone is prepared to pay for your property. The rebuild cost is the amount it would cost to reconstruct the property following a major loss, and this is the figure insurers are most concerned with.
Rebuild costs can vary significantly depending on factors such as the property's location, age, construction type and any specialist features. Period homes, listed buildings, country properties and homes with unique construction methods often have considerably higher rebuild costs than standard brick-built properties.
The same issue can also affect residential landlords and commercial property owners. Any property where an insurer asks you to declare the building's rebuild value or the contents value can be at risk of underinsurance if those figures are inaccurate.
The result can be a serious shortfall if you ever need to make a significant insurance claim.
The Mistake That Catches Property Owners Out
One of the most common misunderstandings is assuming that the amount you paid for a property is the same as the amount it would cost to rebuild it.
For many standard household insurance policies, insurers provide automatic limits for buildings and contents cover. These policies are often based on the number of bedrooms in a property and may, for example, include up to £1,000,000 of buildings cover and £100,000 of contents cover as standard.
However, larger homes often require the policyholder to provide their own buildings sum insured and contents value.
This is where underinsurance can occur.
If those figures are based on the purchase price rather than the true rebuild cost, the property may not be insured for the amount required to fully reinstate it following a major loss.
The same principle applies to commercial buildings and landlord insurance. Whenever an insurer asks you to declare the rebuild value of a building or the value of its contents, it is important that those figures accurately reflect the cost of replacing them.
What Does A Rebuild Cost Include?
Insurers are interested in the cost of rebuilding the property from the ground up.
This may include:
- Demolition and site clearance
- Professional fees
- Architects and surveyors
- Specialist materials
- Heritage craftsmanship
- Labour costs
- Compliance with current building regulations
For some properties, the rebuild cost may occasionally be lower than the market value.
For others, particularly listed buildings, period homes, commercial properties and homes with specialist features, it can be significantly higher.
A Real-World Example Of Underinsurance
Consider a property purchased for £700,000.
Insuring the building for its purchase price may appear reasonable.
However, once specialist construction methods, heritage features, stonework, bespoke joinery and professional rebuilding costs were considered, the estimated rebuild cost was closer to £1.8 million.
If the property had been insured for its purchase price alone, the owner could have been significantly underinsured.
Why Comparison Sites Can Miss Important Details
Comparison websites can be useful for straightforward insurance needs, but they are not always designed to assess more complex properties.
Many rely on limited information and automated assumptions, which can result in:
- Incorrect rebuild values
- Missing property details
- Inadequate cover limits
- Valuable contents being overlooked
- Specialist risks not being identified
The issue is not necessarily the comparison website itself. The challenge is that automated systems cannot ask the additional questions that may be needed to establish the correct rebuild value or identify specialist risks.
Which Properties Are Most At Risk Of Underinsurance?
Underinsurance can affect many different types of property.
Listed Buildings & Heritage Properties
Traditional construction methods and specialist materials can significantly increase rebuilding costs.
Country Homes & Rural Properties
Larger buildings, outbuildings, private infrastructure and bespoke features often result in higher rebuild costs than owners expect.
Period Homes & Character Properties
Older buildings frequently require specialist trades and materials that are more expensive to source and replace.
Residential Landlord Properties
Landlords are often required to declare the rebuild value of their buildings. If this figure is inaccurate, underinsurance can become an issue when making a claim.
Commercial Buildings
Commercial property owners face exactly the same challenge. Where insurers require a declared rebuild value, ensuring it is accurate is an important part of arranging suitable insurance.
Properties With Valuable Contents
Artwork, jewellery, antiques, specialist equipment and collections are frequently undervalued, resulting in insufficient contents cover.
Recently Improved Properties
Extensions, renovations and improvements can all increase rebuild costs if insurance has not been reviewed.
What Happens If You Are Underinsured?
Many people assume they will simply receive a reduced payout.
Depending on the policy wording, insurers may apply what is known as the average clause.
For example:
- True rebuild cost: £1,000,000
- Sum insured: £500,000
- Property insured for 50% of its rebuild value
In some circumstances, a claim payment may also be reduced proportionally. In this example, the insurer may only pay 50% of your building sum insured, meaning a payment of £250 000 could be paid and not even the £500 000 you had it insured for.
This can leave property owners responsible for a significant proportion of the repair or rebuilding costs.
Five Questions Every Property Owner Should Ask
- When was the rebuild value last reviewed?
- Have you carried out any extensions or major improvements?
- Does the property contain specialist materials or heritage features?
- Have you accurately valued your contents?
- Are you relying on a purchase price, market valuation or comparison website estimate?
If any of these questions raise concerns, it may be worth reviewing your insurance.
Why Rebuild Costs Have Changed
Even if your insurance was reviewed several years ago, rebuild costs may have changed significantly due to:
- Rising material costs
- Labour shortages
- Supply chain disruption
- Changes to building regulations
- Increased professional fees
As rebuilding costs continue to change, reviewing your insurance regularly can help ensure your property remains adequately protected.
Peace Of Mind Starts With The Right Rebuild Value
Insurance is there to help you recover when the unexpected happens.
Whether you own your own home, a rental property or a commercial building, understanding the difference between market value and rebuild value can help reduce the risk of underinsurance.
Taking the time to review your buildings and contents values today could help avoid a significant financial shortfall in the future.
Frequently Asked Questions
What Is Underinsurance?
Underinsurance occurs when a property or its contents are insured for less than their true rebuild or replacement cost.
Is Market Value The Same As Rebuild Value?
No. Market value is what someone is willing to pay for a property. Rebuild value is the cost of reconstructing it following a major loss.
Can Landlords Be Underinsured?
Yes. If the declared rebuild value of a rental property is lower than the actual rebuild cost, underinsurance can occur.
Can Commercial Buildings Be Underinsured?
Yes. Commercial property owners may also face underinsurance if the declared rebuild value does not accurately reflect the cost of reinstating the building.
How Often Should Rebuild Costs Be Reviewed?
It is sensible to review rebuild values regularly, particularly after renovations, extensions or significant changes in construction costs.
Unsure Whether Your Property Is Properly Insured?
Whether you own your own home, a rental property or a commercial building, reviewing your rebuild cost and insurance cover can provide valuable peace of mind.
At Scanlan Insurance Brokers, we provide straightforward advice to help homeowners, landlords and commercial property owners understand whether their insurance reflects the true cost of rebuilding their property.