Here, Martin Moore, Client Manager in Edgewater's Insurance team explains how understanding the difference could help you avoid costly underinsurance.
Market Value vs Rebuild Cost
Market value is what your property could sell for and is influenced by factors such as location, demand, local amenities and land value.
Rebuild cost is the amount it would take to rebuild the property from scratch following a major insured event, such as a fire or flood and includes:
- Demolition and site clearance
- Labour and materials
- Architects' and surveyors' fees
- Compliance with current building regulations
Unlike market value, rebuild cost does not include the value of the land.
Why the Difference Matters
The two figures can be very different. For example, a house worth £600,000 may only cost £400,000 to rebuild. Conversely, some commercial properties may have relatively low market values but very high rebuilding costs due to specialist construction requirements.
The Risk of Underinsurance
Buildings insurance should be based on the rebuild cost. If the sum insured is too low, your insurer could reduce any claim payment proportionately under the policy's average clause.
For example:
- Rebuild cost: £800,000
- Sum insured: £600,000
- Fire damage claim: £200,000
As the property is only insured for 75% of the rebuild value, the insurer may only pay 75% of the claim, leaving you to cover the shortfall.
Overinsuring can also be costly, as you may pay a higher premium without receiving any additional benefit at claim stage.
Commercial Properties Require Extra Care
Calculating rebuild costs for commercial premises can be more complex. Factors such as specialist construction, listed status, external works, professional fees and changing building regulations can all affect the true cost of rebuilding. Rising construction costs also mean rebuild values should be reviewed regularly.
Getting the Right Figure
Online rebuilding cost calculators can provide a useful estimate for many standard homes. However, these tools are typically based on UK data and do not take Isle of Man-specific factors into account, so the figures should be treated as a guide rather than a definitive valuation. For larger, unusual or commercial properties, a professional assessment by a qualified surveyor is often the most reliable way to establish an accurate rebuilding cost.
Regular reviews are also important, particularly following extensions, refurbishments or periods of rising construction costs, to help ensure your sum insured remains appropriate.
Need a Review?
Making sure your property is insured for the correct rebuild cost can help protect you from unexpected financial losses after a claim.
If you are unsure whether your current buildings insurance reflects the right rebuild value, contact the team on 01624 654000 for a review of your cover. A quick conversation today could help prevent an expensive mistake tomorrow.
