“What do these terms actually mean?”
Quite simply, the building sum insured, rebuild cost or reinstatement cost requested during building insurance applications is the amount of money for which your home is insured for in case of total loss. It is worked out by understanding the total cost you would have to pay to completely rebuild your property from scratch; therefore this sum should always include VAT, debris removal and professional fees such as surveyors and architects.
The sum insured under a buildings policy must be the full rebuild cost of the home. The market value of your home or the Council Tax band valuation has no direct relationship to the rebuild cost. This can be seen especially with houses within London and the South East where a typical Victorian terraced property will have a rebuild of between £200,000- £300,000, whereas the market value could be £1- £2 million or higher.
Why is this important?
The building sum insured is the most your insurers will pay out under any circumstances. You must calculate an adequate sum insured to avoid claim payments being reduced because of under insurance (average clause – see below). Regular checks and annual uplifts should be applied to ensure it remains correct. It is your responsibility to find out the correct sum insured amount.
Average Clause and Underinsurance
If you are underinsured and a claim occurs, most insurers will only pay out a proportion of the total cost to the rebuild, in relation to how underinsured you are. For example, if you are insuring your property for a rebuild value of £200,000 and in fact the correct value is £300,000, the most an insurer will pay out is 2/3rds of any claim amount in relation to the buildings.
Equally important is that a generic figure should never be used and is usually totally inappropriate as similar sized houses can have vastly different rebuild costs depending on quality of construction, materials used and permanent fixtures and fittings within the house.
If you have any questions or would like to discuss your building insurance query please contact Josh Robinson at Insurance Tailors.