Rebuilding Costs

Your questions answered

Why does the recommended sum insured have to be so high?

All high value buildings insurance policies cover not just the main house and the drives, paths, patios, gardens, boundary walls and fencing, but also all the outbuildings and other features such as swimming pools and tennis courts. In many cases, the extra cost of rebuilding these additional features can be very high. For example, there have been cases where the cost of rebuilding boundary walls actually exceeded the cost of rebuilding the main house.

Generally speaking, rebuilding costs tend to be far more expensive for older properties, particularly those that are listed buildings. At the same time, all high value insurance policies have to allow for rebuilding to the same specification as existed prior to the claim, with all the work being carried out in accordance with current building regulations.

As you’ll appreciate, this can prove expensive. As an example, a house built of stone may cost as much as 50% or more to rebuild than a house built of brick. Moreover, with many older properties having been built on inadequate foundations compared to today’s standards, high value policies have to allow for the cost of new, regulation-compliant foundations.

High value insurance policies also provide cover for the cost of demolitions, debris removal and architects and surveyors fees, all of which must be factored into the rebuilding costs, thus raising the sum insured to higher-than-standard levels.

Why can’t I apply the BCIS reinstatement rates to my house?

For many years, the rebuilding costs for domestic property insured in the UK have been calculated using data provided by the Building Cost Information Service (BCIS).

However, while the BCIS data provides a very useful guide and benchmark for most ‘standard’ homes, it’s apparent that, for many high value properties, BCIS’s recommended costs do not match the sums required for the reinstatement of expensive refurbishment work and interior design schemes introduced by high net worth property owners. BCIS bases its costs on standard models. High value homes often have higher levels of specification that need to be taken into consideration.

It’s also important to remember that the quite understandable limitations of the BCIS guide put all listed homes, which often need to be reconstructed using specialist materials or vernacular techniques, outside the scope of their data.

Quite clearly, the costing data applied to high value homes must take into account the property’s special features, if our clients’ home insurance is to match the real expense of reinstatement.

As a result, we encourage most of our clients to take professional advice and to insure at levels above those quoted by BCIS, to make sure they are correctly insured and not at risk from underinsurance.

Why can’t the BCIS price per metre be applied to my home, just because it’s larger than a ‘standard’ home?

It’s not just a question of size; larger homes do tend to have higher levels of specification.

Most high value homes are not only larger than BCIS’s ‘standard’ model homes, they also feature many costly extras such as security and fire protection systems, high-grade locks and security grilles or electric window shutters, air conditioning, complex hi-tech heating and hot water supply systems, integral sound systems and Lutron lighting systems.

Features such as these set high value homes apart from the rest of the ‘standard’ housing stock and thus outside the parameters of the BCIS data.

I had a survey carried out by my finance people and their recommended sum insured is lower than the reinstatement cost assessment you suggest. Why can’t I use their figures?

The main purpose of any mortgage valuation is to verify the market value and condition of the house so that, in the event that the mortgage company has to repossess and then sell the property, they will have a marketable asset on their books.

Very often, inappropriate average or indicative rates are used to arrive at the sum insured and, of course, no allowance is included for any subsequent alterations or additions. A specialist valuation is usually required for high value homes to ensure the sum insured is correct.

I have contacts that suggest I could rebuild my home for a lower figure than you suggest. Why can’t I insure at that level?

The rebuilding costs used for insurance purposes have to allow for the cost of demolitions and debris removal. If you built or have re-built your home, you may not have included this within your calculations.

Equally, if your home is listed, it can often be very expensive and time-consuming to record, photograph and even label the fabric of the building to ensure the correct reconstruction.

Similarly, special offers and discounts that were available when you first built, renovated, decorated or refurbished your home are not usually available the second time around. Indeed, when an insurance company is settling a claim, all the evidence shows that suppliers are far less likely to ‘strike a deal’ or charge discounted rates. Moreover, your contacts and connections may have changed or gone out of business, leaving you unable to secure the same prices for goods or services following a loss.

Even if you are in the building trade and have bought items in bulk, using the majority for other projects and retaining some for your own home, it’s clear from the evidence associated with losses that, where one has to refurbish or rebuild in isolation, unit costs can increase significantly.

Lastly, if you have personally project-managed the construction or major refurbishment of your home, you will have saved a lot of money by giving up your time free of charge and not employing others to do this on your behalf. You may not be in a position to – or even want to – take on this responsibility following a loss. Most people, faced with having to rebuild their home, usually opt for having the rebuilding professionally project-managed. This results in additional contractors’ overheads and profit, as well as professional fees.

In summary, we have to recommend that our clients insure for values that are suitable for their homes and subject to normal tender processes, because there is no guarantee that deals and discounts that were previously available will still be available in the event of a major claim.

How do you arrive at a reinstatement assessment?

Costing data is obtained from a variety of sources but suggested rates are not used without referring to other evidence found on site. Building rates applied take into consideration a range of factors starting with the type, size and quality of materials found at your home. Allowance is made for special features found in each property, for vernacular materials where relevant, and for architectural details.

Outbuildings and hard landscaping are also included in the assessment. If particular features, such as a conservatory or tennis court, have been added, these costs will be factored in.

Other points, including the specific location of the building, will also be factored into the cost analysis. If, for example, your home is in a rural location and some distance from key suppliers, or if access is restricted in some other way, there will be an increase in materials delivery costs, which will have to be taken into consideration.

With the downturn in the building industry, prices have fallen. Why hasn’t my assessment gone down?

Insurance indices are based on researched tender prices, which are taken across all types of building, not just residential properties. These tender prices do not actually reflect final accounts (which are never published) but – in a stable economic environment – are normally considered suitable for index linking.

Over the past year, the tender price index has remained fairly stagnant and has fallen in most regions. However, there are regional differences and there have been increases in both labour and materials.

In an economic downturn, it is common practice for firms to seek to ‘buy’ work by submitting low tenders and, during the course of the project, find ways of increasing their margin and the final account.

Moreover, with listed buildings and high value properties in general, reinstatement work will call for specialist craftsmen, who are often in short supply, and for furnishings and fittings which, if they are sourced from Europe or elsewhere, will be subject to exchange rate fluctuations.

All these factors militate against reduced assessments that could reflect the general downturn in the building industry.

July 2009