Through 2022 the cost of building rose faster than it had for decades, driven by material prices, energy costs and labour shortages. Building insurance is based on the cost of rebuilding, not the market value, so a sum insured that was right a few years earlier could now be well short. Industry bodies, including BCIS, warned of widespread underinsurance.
Why it matters: the average clause
Many policies contain an average clause. If a building is insured for less than its true rebuilding cost, the insurer can reduce any claim in the same proportion. A building insured for 70 per cent of its rebuilding cost might receive only 70 per cent of a claim, even for a small loss. For a block of flats, the shortfall falls on the freeholder and, through the service charge, on the leaseholders.
What a reinstatement cost assessment covers
A reinstatement cost assessment estimates the full cost of rebuilding the building to its existing form after total loss. That includes demolition and site clearance, professional fees, statutory fees and, where relevant, the extra cost of rebuilding a listed or period building in matching materials. It is carried out in line with the RICS guidance note Reinstatement cost assessment of buildings.
When to have one
- When it has been several years since the last assessment.
- After significant alterations or extensions.
- When costs have moved sharply, as they did in 2022.
- For listed and period buildings, where rebuilding costs are often underestimated.
Between full assessments, the figure can be index linked, but indexing is only as good as the starting figure.
See our Insurance Claims and Reinstatement service, and what happened when a commercial unit was rebuilt after a total loss.