How to avoid being underinsured on a rebuild
Inflation has soared to a 30-year high of seven per cent, the cost of fuel is growing rapidly, the war in Ukraine is affecting the cost of some materials and there is an ever-increasing trend for home renovations.
This has resulted in much higher costs for building materials and for builders and other tradespeople. Both materials and labour are also difficult to source.
The result is that the cost of building, rebuilding and repairing a home is more expensive.
Analysis of the BCIS General Building Cost Index indicated a rise of 10.2 per cent in September 2021 compared with the same period in 2020.
Materials represent the largest contribution to this increase, with the overall cost up by 19.7 per cent.
Andrew McRoyall, associate in the architecture and building surveying team at Savills in Yorkshire, explains why increased prices could create issues for homeowners. He says: “Higher prices leave homeowners vulnerable to the risk of being underinsured in the face of major repairs or, worse, a significant or total rebuild.
“Buildings should always be covered for the amount it would cost to replace them, and that cost could be much greater than anticipated.”
Here are some tips from Savills for those reviewing their home insurance:
When you apply for home insurance, you are asked to estimate the rebuild value of your property. Insurers usually only increase the estimated rebuild value marginally each year so unless homeowners actively change this figure themselves it could impact an insurance claim.
In order to avoid any issues, we would recommend appointing a qualified chartered surveyor to carry out a rebuild cost assessment (RCA). An RCA details the amount it would cost to completely rebuild your home were it to be destroyed beyond repair, in a fire, for example. It includes the cost of labour and materials.
Our usual advice would be to undertake an RCA every three to five years. In between rebuild cost assessments, an insurer will usually increase the values by a nominal amount annually in line with projected inflation. Under normal circumstances this would suffice, but these are not normal times. For example, in a recent revaluation, we saw the rebuild cost for a suite of farm buildings increase by 21 per cent, and the house by 35 per cent, in one year. Had the homeowner not instructed an RCA, their property would have been underinsured. With this in mind, we would recommend that an assessment is carried out more frequently.
In the event of a property being underinsured, the insurance provider may invoke the Condition of Average Clause. This is where the total claim is reduced proportionately to the value of underinsurance. For example, if a house is insured for £500,000 but should be insured for £600,000, it is insured at 83 per cent of its value – with the homeowner liable for the shortfall. This means the payout for a £300,000 flood claim might only be around £250,000.
Andrew adds: “A higher rebuild cost will inevitably lead to an increased insurance premium. However, this rise, as well as the cost of the RCA, is arguably worth the peace of mind of knowing your assets are fully covered to today’s market values,” adds Andrew.
For more information, or to discuss rebuild cost assessments in more detail, contact Andrew McRoyall at Savills Yorkshire on 01904 756 311.