By Daniel Floyd, Client Director – Konsileo | Property Insurance Specialist
What Property Owners Need to Know About Reinstatement Cost
One of the questions I am asked most often by property owners and managers is this: “My property is worth £750,000 – should I insure it for that?”
The answer is no. And understanding why could save you from a very significant financial shortfall at exactly the moment you need your insurance most.
What Is the Difference Between Market Value and Rebuild Cost?
Market value is what your property would sell for on the open market today.
Rebuild cost – also called reinstatement cost – is something entirely different. It is the total amount it would cost to completely rebuild your property from the ground up following a major loss such as a fire, flood or structural collapse.
The rebuild cost typically includes:
- Demolition and removal of debris
- Site clearance
- Building materials and labour
- Architects, surveyors and other professional fees
- Planning permission and building regulation compliance
- Specialist construction requirements
- Inflation during the reinstatement period
The rebuild cost and the market value of a property can differ significantly – in either direction. A property with a market value of £2 million may have a rebuild cost well below that figure. Equally, an older or more complex property with a modest market value could cost considerably more to reinstate than its market value suggests.
Why Should You Insure Your Property for Its Rebuild Cost, Not Its Market Value?
Buildings insurance should always be based on the reinstatement cost, not the market value. If your property is destroyed, you are not buying a replacement on the open market – you are rebuilding it on the same site, to current building regulations, using current materials and labour costs.
Insuring for the market value alone may leave you significantly underinsured – with serious financial consequences at claim time.
What Is Underinsurance and Why Does It Matter?
Underinsurance occurs when the sum insured on your buildings policy is lower than the actual cost of reinstating the property.
Most commercial and residential property policies contain what is known as an average clause or condition of average. This means that if your building is underinsured, your insurer may reduce your claim settlement proportionally to reflect the shortfall.
Example: If your property has a true reinstatement cost of £2 million but is insured for only £1.5 million, you are insured for 75% of the correct figure. In the event of a major claim, your insurer may only pay 75% of the loss – leaving you with a shortfall of hundreds of thousands of pounds at the moment you can least afford it.
This is not a theoretical risk. Underinsurance is one of the most common and costly issues in UK property insurance, affecting residential landlords, commercial property owners and mixed-use property managers alike.
Why Is Reinstatement Cost Assessment Particularly Important for Blocks of Flats?
Blocks of flats and larger residential or mixed-use developments present particular challenges when it comes to reinstatement valuations. The complexity goes well beyond the cost of the individual flats themselves.
A full reinstatement cost assessment for a block of flats may need to account for:
- Communal areas, stairwells, hallways and entrance lobbies
- Shared services including heating systems, water and electricity infrastructure
- Lifts, plant rooms and mechanical and electrical equipment
- Specialist architectural or heritage features
- Demolition and debris removal costs
- Professional fees for architects, structural engineers and project managers
- Compliance with current building regulations, which may be considerably more demanding than those in place when the building was originally constructed
For freeholders, resident management companies (RMCs), right-to-manage (RTM) companies and property managing agents, ensuring that buildings are correctly valued is a fundamental part of managing risk responsibly – and in many cases, a legal obligation under the terms of the lease.
What Is a Reinstatement Cost Assessment?
A reinstatement cost assessment (RCA) is a professional valuation carried out by a qualified surveyor. It establishes the correct sum insured for buildings insurance purposes by assessing the specific characteristics of the building and calculating what it would cost to rebuild it today.
For smaller, straightforward properties, tools such as the RICS Building Cost Information Service (BCIS) calculator may provide a reasonable starting point. For larger, older, listed or more complex properties, a full professional assessment by a chartered surveyor is strongly recommended.
How Often Should You Review Your Buildings Reinstatement Cost?
When was your building last professionally assessed for its reinstatement cost?
If the answer is “I can’t remember”, “several years ago” or “my insurer automatically uplifts it each year” – it is time to review it.
Automatic index-linked increases applied by insurers at renewal are not a substitute for a proper valuation. Index linking adjusts the sum insured in line with a general construction cost index, but it cannot account for changes specific to your property, significant increases in local labour costs, changes in building regulations, or the cumulative effect of years of undervaluation.
As a general guide:
- Properties should be professionally reassessed at least every three to five years
- A reassessment should be carried out promptly following any significant alteration, extension or improvement
- Any period of significant construction cost inflation – such as that seen across the UK in recent years – is also a trigger for an immediate review
Frequently asked questions
Only if the sum insured is set correctly. Buildings insurance will cover the cost of reinstating your property - but only up to the figure stated in your policy. If that figure is too low, you may face a significant shortfall following a major claim.
If your policy contains an average clause or condition of average - which most commercial and residential property policies do - your insurer may reduce your claim settlement in proportion to the level of underinsurance. This can result in a substantial shortfall even on a partial loss.
For straightforward properties, the RICS BCIS online calculator provides a useful starting estimate. For larger, more complex or listed buildings, a professional reinstatement cost assessment carried out by a chartered surveyor is the most reliable approach.
No. They are two entirely different figures. The rebuild cost reflects what it would cost to reconstruct the building on its existing site today. The market value reflects what a buyer would pay for the property. The two figures can differ significantly.
As a general guide, every three to five years - or sooner following significant works, a change in use, or a period of significant construction cost inflation.
A reinstatement cost assessment (RCA) is a professional survey carried out by a qualified surveyor to establish the correct rebuild cost of a property for insurance purposes. It is the most reliable way to ensure your buildings sum insured is accurate.
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What Should Property Owners and Managers Do Next?
Whether you own a single investment property, a portfolio of residential lets, a block of flats, a commercial unit or a hospitality venue, I would encourage you to ask yourself two straightforward questions:
- When was my building last professionally valued for reinstatement cost?
- Am I confident that the sum insured on my buildings policy reflects what it would actually cost to rebuild today?
If you are unsure of the answer to either, it is worth speaking to a specialist broker who can review your current arrangements and, where appropriate, recommend a professional reinstatement cost assessment.
Daniel Floyd is a Client Director at Konsileo, specialising in property insurance, high net worth insurance, hospitality insurance and retail insurance.
If you would like to discuss your property insurance arrangements, please get in touch.
