Insuring your property means providing you and your family with the reassurance that should the worst happen, your home and your investment is protected. When you take out home insurance, or any form of property development insurance one of the things that insurers look at when calculating your premium is the reinstatement cost of your property. But what does this mean?

What does reinstatement cost mean?

The reinstatement cost of a property is the amount it would cost to totally rebuild the property in the event that it was totally destroyed. So for example if a fire burned your property down, or if it was left in such a state of disrepair that it had to be completely knocked down and rebuilt, the reinstatement cost is the sum of money it would take to reinstate it to how it was previously.

The reinstatement cost takes into consideration clearing the land of debris, labour, building materials, as well as reinstalling facilities such as double glazing and central heating. It allows for the same materials to be used as in the original property, as well as similar or the same construction processes.

As such, the reinstatement value of your property is different to the market value. Just because your property is worth £1 million, it does not mean that it would cost £1 million to rebuild the property from scratch.

What factors are taken into consideration when calculating the rebuild value?

Calculating the reinstatement value of a property is not always straightforward, especially on older properties. Factors that can cause complications are:

  • Location – The type of demolition work on the property can vary depending on where it is situated and what is in the surrounding area. Properties in conservation areas provide an extra layer of complexity.
  • Geography – Costs for labour and materials can vary depending on where in the country the property is located.
  • Listed buildings – Specialist materials or building techniques can be needed to restore listed buildings to their original state.
  • Asbestos – Some older properties may contain asbestos. Removing and replacing this can add significant cost to a rebuild.
  • Local authorities – In some areas it may be necessary to cordon off some pavement or road around the premises to facilitate the rebuild. In some cases this will be chargeable y the local authority.

Only a qualified surveyor can value a property. There is a cost involved in this, however some insurers will include a valuation summary as part of your insurance premium. The Royal Institute of Chartered Surveyors provides some guidelines on calculating reinstatement cost, but every property and project has its own intricacies, and a professional valuation should always be sought

Why is the reinstatement cost of a property important?

To obtain a mortgage on a property, a lender will need to see that the property is correctly insured. It is in their interest to ensure the insurance policy is correct so that if catastrophic damage occurs, the customer is able to rebuild their property and to continue paying the mortgage.

If you do not have a correct reinstatement value in place, you could be facing a major financial shortfall should the worst happen. Most insurers will only pay out their share of any costs incurred and not cover the full reinstatement if your sum insured is insufficient. Average usually applies.

For example, if your property is worth £1 million and you are only insured for £750,000, you would be 25% underinsured. Therefore if you suffer a total loss and your full home is destroyed, insurers would only pay out 75% of your sums insured, meaning a maximum of £562,500 would be payable to you.

It is advisable to get regular updates on your property’s reinstatement value. The price of building materials can be volatile. A small rise in the price of a material can have serious implications further down the supply chain. As the cost of materials rise, your reinstatement value rises too. A reinstatement cost from 10 years ago will not be accurate now, and if the worst happens you could be considerably underinsured.

An accurate reinstatement cost means accurate insurance cover

At Stanhope Cooper, we make sure that your reinstatement value is accurate and up to date when sourcing insurance cover for your property. We pride ourselves on ensuring that our clients are not over-insured or under-insured, but correctly insured, and that the correct level of insurance is maintained over the course of your cover.

We take the hassle out of your insurance by arranging for your property to be valued by a qualified surveyor. At the same time, should you wish, you do of course have the option of organising this yourself.

We cover all sorts of properties – family homes, holiday homes, and commercial properties as part of SME business insurance. If you would like to know more about your property’s insurance, or reinstatement cost we would be delighted to speak to you.

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Written by: Stanhope Cooper

Date: Friday 3rd August, 11:11am