Why it's important to get an accurate rebuild cost for your rental property
If your rental property is an investment, it's essential to cover everyday risks such as fire, storm, flood, or damage caused by your tenant, whether accidentally or maliciously. All these things count when considering your insurance options, but have you checked that you have the correct buildings sum insured if you ever need to rebuild your property?
As you can imagine, the financial impact of being underinsured could be costly and damaging for you and your business. According to the Financial Conduct Authority (FCA), up to 40% of the UK's small and medium-sized enterprises (SMEs) could be underinsured. This is based on the FCA's Thematic Review of Commercial Claims.
What are rebuild costs, and why do they matter?
The rebuild cost of your property (buildings sum insured) is the amount it would cost to rebuild the property if it were destroyed. These costs include materials, labour, demolition, and fees for professionals, such as architects and surveyors.
The Building Cost Information Service (BCIS), defines rebuild costs as: "the costs of demolishing and clearing away the existing structure and rebuilding it to its existing design in modern materials, using modern techniques, to a standard equal to the existing property and in accordance with current Building Regulations and other statutory requirements."
Rebuild costs are not the same as your property's market value or your council tax band valuation. The market value is usually higher than the rebuild cost because it includes the land your property sits on, but this isn't always correct. Each risk needs to be calculated based on its specific circumstances. Rebuild costs don't include the value of the land because when a building is destroyed, the land is usually unaffected.
Why do you need to know the rebuild cost?
When you take out Landlord Buildings Insurance, your provider needs to know how much your property should be insured for in case it's destroyed and you need to make a claim. The rebuild cost directly affects the insurance premium you must pay.
What happens if you under or overestimate the rebuild cost of your property?
As the property owner, it's your responsibility to get the rebuild cost figure right. If it's calculated too low, you may be underinsured, potentially leading to a shortfall in the amount the insurer will contribute towards a claim of any size. If it's calculated too high, you could be paying too much for your Landlord Insurance.
What factors might affect your rebuild costs?
The size of your property and the number of bedrooms will affect the rebuild cost, but that's not all.
If your property is built from non-standard materials, it's likely to be more complicated (and expensive) to rebuild. For example, if the walls are made from concrete rather than brick or if there is a thatched roof instead of tiles, your rebuild costs may also increase if your property is situated in an awkward location, making it difficult to access and get materials to the site.
Another thing to consider is whether your property is a listed building. If it is, the rebuild costs will usually be higher. The region in which your property is located can also impact the rebuild value.
If your property is built from something other than brick or stone or is historic or listed, you won't be able to use the BCIS rebuild calculator. The BCIS calculator also doesn't apply to:
- Houses with more than three or four storeys (depending on age) or with basements.
- Flats in a block more than four storeys high or include communal areas beyond stairs and corridors.
- Houses or flats with special design features.
- Houses or flats that aren't of average quality (although guidance is given on the possible range).
- Houses or flats that are much larger than the average UK home. This also includes single properties that have since been converted into flats.
- Houses containing hazardous materials, e.g. asbestos that are likely to require special precaution/treatment following damage or demolition.
Why you should review your rebuild costs regularly
You should review your rebuild costs regularly to make sure you always have the right level of insurance cover. This is particularly important if you make any changes to the property, such as building an extension or adding a conservatory, as it could increase the rebuild costs.
Some insurers use 'index linking'. This means that at each yearly renewal, your insurer will update the buildings sum insured according to an index and then alter your insurance premium in line with this. This helps protect you against underinsurance. The indexes used are linked to inflation and calculated using several other factors. Although index linking will keep the insured sums up to date against inflation rises between rebuild cost reviews, the initial rebuild costs must be correct from the outset if you want to be certain that you have enough insurance cover.
The BCIS also recommends reviewing your rebuild costs at least every five years rather than relying on index linking over long periods.
Check with your insurer to see if they use index linking. If they don't, you might not have sufficient insurance to cover increasing rebuild costs annually.
By reviewing your rebuild costs regularly, you can ensure you've always got the right level of cover.
How to calculate rebuild costs for insurance
There are a few different ways to calculate your rebuild costs. You could use a rebuild cost calculator, like the BCIS calculator which gives you an estimated range based on the information you provide.
When you are getting a Landlord Insurance quote with us, you can access the BCIS calculator to get a rebuild estimate. There are limitations to the BCIS calculator as it isn't available for all risks, for example, you can't get an estimated rebuild cost for flats.
An alternative and more reliable method is to appoint a professional chartered surveyor to give you a rebuild cost estimate. Find a surveyor near you.