How to calculate the house rebuilding cost for your insurance policy
The rebuilding cost of a property is also known as the reinstatement cost and is used as the sum insured for insurance purposes. In order to minimise the risk of under insurance, you need to have a good idea of how much it would cost to demolish and rebuild your home. In most cases, an insurer will require you to provide this figure to them in order to provide an insurance quote for your property.
Can I just use the market value as the basis for calculating rebuilding cost?
No. Over the years many property related businesses have been giving unqualified advice about how to calculate a building sum insured for a property. They often profess to have a formula that you can apply to the market value of the property to calculate the rebuilding cost.
This is absolutely wrong. There is no reliable correlation between market value and reinstatement cost.
The ONLY formula you can reliably use is this one.
The rebuilding cost is often a lot lower than the market value
The rebuilding cost is often a lot higher than the market value
Imagine a property in a depressed part of a town known for having high street crime, overlooked by tall factory buildings with poor local ameneties and traffic and parking problems. The cost of demolishing and rebuilding that property may well exceed the market value. Move the same house to a lovely street at the top of a hill just outside the same town with glorious views of the countryside and the market value changes beyond measure. However, the cost of rebuilding the house would be the same (in fact, in an area free of the town congestion, the out of town example may even be less).
Recently, we spoke to a gentleman who was assured by an insurance advisor that he should use the market value. He was told that in the event of a serious claim, if the rebuilding cost was higher, the insurer would meet the additional cost. Nothing could be further from the truth. Choosing the correct amount insured is the policyholder’s responsibility and it is the policyholder who will bear the cost if he gets it wrong.
For an indication of the rebuilding cost of your house from a source qualified to give one, there is an online calculator provided by the Royal Institution of Chartered Surveyors which will give a reasonable estimate taking into consideration the location, size, age, construction and other features of your property
Whereas we recommend use of this site to check that your existing amount insured is in the expected range, if you have no idea the correct building sum insured for insurance purposes, you should seek the opinion of a suitably qualified professional. Remember, insurance advisers, estate agents, even builders may give you their opinion, but none of these is qualified to provide such advice and none of them posses a magic formula. there is no substitute for the advice of a qualified surveyor.