If I had a penny for the number of times I have had to explain to a client why a property needs to be insured for its rebuild cost, I’d probably have enough money saved for a half decent round of drinks at Wetherspoons.
Clients often seem confused over the sum they need to insure for. We always ask ‘What would it cost to rebuild the property’, as in the worst case scenario, that’s how much a claim could possibly be. Most clients will answer “Well I just paid £xyz for it”, but very rarely does the purchase price reflect the rebuild cost. In a difficult property market, property prices can often be significantly below the cost of rebuilding. Conversely in a buoyant market, the opposite can apply.
Another favourite response from a client is “Well it has just cost me £xyz to build it, so thats the rebuild cost”. Again thats not correct. There are significant extra expenses incurred when rebuilding a premises. The cost of clearing a site after a fire, for example, is frightening. Unrecoverable VAT can also be a big issue. Realistically you can easily add between 25% and 35% to the cost of a build, for a rebuild.
Why do these things matter? Well insurers make policies subject to what’s called an Average clause. Thus if you insure a building for £100,000 and the rebuild cost is £200,000 then they would consider you to be providing cover for half the building yourself. They will apply average to the claim, hence if you have storm damage for £5,000 they consider you to be covering half of the claim, and themselves likewise. Hence a payment of £2,500 (less any deductible) would be paid.
Insurers will rarely be willing to give any indication of a property’s rebuild cost as this is a specialist field, best undertaken by a Chartered Surveyor. When purchasing a property, one frequently obtains a valuation from a surveyor as part and parcel of its Financing. Always ask the surveyor to provide a Rebuild figure in his report as well as a Valuation. This provides a good base figure for when you first insure the property, with future increases in rebuild cost being partially protected by the policy being index linked.
Paul Barry – Managing Director