How much buildings insurance do I need?
When you set up buildings insurance, one of the first questions you will be asked is how much cover you need. Most first-time buyers assume the answer is the price they paid for the property. It is not, and getting this wrong can leave you significantly underinsured without realising it.
The figure that matters is the rebuild value, and it is different from the market value in ways that are worth understanding clearly.
Market value vs rebuild value
The market value of your property is what someone would pay to buy it today. It includes the land, the location, the local amenities, the state of the market, and a dozen other factors that have nothing to do with the physical building itself.
The rebuild value is what it would cost to demolish the existing building and construct an identical one from scratch, including professional fees (architects, surveyors, structural engineers) and the cost of materials and labour.
These two figures can be quite different, and the difference goes in both directions depending on your property.
In many cases, the rebuild value is lower than the market value. This is particularly common in areas where land values are high. The market value of a flat in a city centre includes significant land value. The rebuild cost (replacing the physical structure) is lower than the total market price because land cannot be destroyed and does not need to be included in the insurance calculation.
In other cases, the rebuild value exceeds the market value. This can happen with listed buildings, unusual constructions, thatched properties, or homes in areas where labour and materials are expensive relative to local house prices. The cost of rebuilding to the required specification can be higher than the property's open market value.
Neither scenario is unusual. What matters is that you use the rebuild value, not the purchase price, when you set your sum insured.
What happens if you get it wrong?
If you insure for too little (a situation called underinsurance), most insurers will apply what is known as averaging or proportional settlement when you make a claim.
The principle is straightforward but the consequences are serious. If your property would cost £320,000 to rebuild and you have insured it for £200,000, you are insured for approximately 63% of the rebuild cost. In the event of a partial claim (say, £80,000 of fire damage to the rear of the property), the insurer will pay only 63% of that: approximately £50,000. You bear the remaining £30,000 yourself.
Underinsurance does not just affect total loss claims. It affects every claim, even partial ones. And because most claims are partial, flooding in one room, storm damage to the roof, rather than total destruction, the impact of underinsurance shows up regularly.
What underinsurance costs you
If your property would cost £320,000 to rebuild but you've insured it for £200,000, you're covered for roughly 63% of the rebuild cost. On an £80,000 partial claim, your insurer may pay only around £50,000, leaving you to find the remaining £30,000 yourself.
How to calculate your rebuild value
There are several practical ways to arrive at the right figure:
- Use a rebuild cost calculator. The Association of British Insurers and the Building Cost Information Service (BCIS) provide online rebuild cost calculators that give you an estimate based on the property's size, type, age, and location. These are free to use and provide a reasonable starting point for standard residential properties.
- Check your survey or mortgage valuation. If you had a homebuyer's report or a full structural survey carried out when you bought, the surveyor may have included a rebuild cost estimate in the report. This figure is typically more accurate than a calculator estimate for unusual or complex properties.
- Commission a formal rebuild cost assessment. If your property is listed, has unusual features (a thatched roof, stone construction, or significant period detailing), or if you want confidence in the figure you are using, a RICS-registered surveyor can provide a formal reinstatement cost assessment. This costs between £100 and £500 depending on the property and the surveyor.
Keep the figure up to date
Building costs are not static. The cost of materials and labour rises over time, and a rebuild value that was accurate when you took out your policy three or four years ago may no longer be adequate today.
Most insurers apply an index-linked adjustment each year, which automatically increases your sum insured in line with a measure of building cost inflation. This helps, but it is not a substitute for reviewing the figure periodically, particularly if you have carried out significant building works that have increased the size or specification of the property.
Review your sum insured annually. If you have extended the property, converted a loft, or added significant features since you last checked, update the figure accordingly.
Does the sum insured cover outbuildings and other structures?
Most standard buildings insurance policies extend to cover outbuildings such as garages, garden sheds, and garden walls, up to a combined value limit. Check your policy documents for the specific limit and whether the structures you have in mind are included.
Swimming pools, tennis courts, and more substantial outbuildings may require specific mention in the policy, or may be covered up to a specific sub-limit. If in doubt, call your insurer and ask. It is always better to confirm than to assume.
What about listed buildings?
If your property is listed, the rebuild cost calculation is considerably more complex. Listed buildings cannot be demolished and rebuilt using standard modern materials and methods: any repair or rebuilding must meet the requirements of Listed Building Consent and use materials and techniques that are appropriate to the original construction.
This can make the rebuild cost significantly higher than a comparable unlisted property. Standard rebuild cost calculators are not designed for listed properties, and using one will almost certainly produce an inaccurate figure.
If you own or are buying a listed building, a formal reinstatement cost assessment from a specialist surveyor is essential. Some insurers specialise in listed buildings insurance and can provide guidance on the appropriate approach.
The short version
The sum insured on your buildings insurance policy should reflect the rebuild value of your property (the cost of demolishing and rebuilding it from scratch), not the purchase price or market value.
Getting this figure wrong leaves you at risk of a proportional settlement if you make a claim, meaning you bear a portion of the cost yourself even for partial damage.
Use a rebuild cost calculator for standard properties, and commission a formal assessment if your property is listed, unusual in construction, or has been significantly extended or altered. Review the figure annually and update it whenever your property changes.
This article is for informational purposes only and does not constitute financial or insurance advice. Always speak to a qualified adviser before making decisions about protection or insurance products.