What are reinstatement values and why are they so important?
In its simplest terms a ‘reinstatement value’ is how much it would cost the owner of a property to rebuild their home or building from scratch, like for like and on the exact same piece of land. This value takes factors such as demolition costs, materials costs, local labour costs, architect and surveyors fees, modern construction and building techniques, land, location, school catchment areas, supply and demand into consideration. We use reinstatement values when arranging building insurance cover. If a property is under insured the insurer’s settlement figure might be way off the mark leaving owners substantially out of pocket, or worse…not able to complete the rebuild. In a nutshell the reinstatement value insured should cover worse-case scenarios (think aeroplanes falling out of the skies, lightning strikes, subsidence, landslips, explosions, earthquake) and the maximum amount of loss possible.
Where a property is under insured, insurance companies can apply an ‘average clause’ or ‘condition of average’ clause which reduces their pay out sometimes as much as 50-75%. The reinstatement value is the maximum risk the insurers are insuring and what they base the annual premium on. It follows that if you give a lower value (with or without intention), you will pay a lower premium, so should not then receive a pay-out for a much higher sum when you have not paid a premium to warrant that. Often the average clause appears with a ‘special condition of average’ clause that defines when the average clause can be applied e,g when the difference in the values falls below a certain %. This gives room for some natural fluctuation of values over the insured period.
It is imperative that reinstatement values are reviewed regularly. You can find reinstatement values on home buyers surveys, mortgage valuations, insurance schedules and renewal invitations however, they can quite quickly become out of date. When considering the value, for standard properties the calculator provided by The Building Cost Information Services of the Royal Institution for Chartered Surveyors (RICS) is often referred to https://abi.bcis.co.uk/ however, for anything more complicated, listed, commercial or multi-use, a chartered surveyor services should be employed.
Building insurance is not always arranged by the homeowner. If you buy a flat you would normally contribute to your block’s insurance via your service charges. Typically the landlord / freeholder nominates, approves (via the Managing Agent), or arranges the insurance. First, under the Landlord and Tenant Act 1985 (as amended by the Commonhold and Leasehold Reform Act 2002) leaseholders have the right to ask the landlord (or Managing Agent) for a written summary of the current insurance and inspect the insurance policy. Second, if leaseholders do not agree with the reinstatement value and the landlord will not review this, they can apply to the First Tier Tribunal to determine whether the insurance from the nominated insurer is unsatisfactory. AB’s Block & Estate Management Team work with accredited brokers to ensure that where we are instructed by clients to place insurance, that cover is sufficient. We also recommend that clients consider regular reinstatement valuations as part of their responsibility to their leaseholders.
It is also important to consider and update your home’s rebuild cost when you make structural changes, extend, covert lofts, or other such projects that add extra value. This is quite often overlooked and again, if your rebuild costs increases without your ‘reinstatement value’ being increased to match then you can be underinsured and find that to your financial detriment. It does go both ways though…sometimes you might find that you are over insured and thus paying too much in premiums!
Insurance policies differ vastly, including what is and isn’t covered so you should always check your policy before starting a new policy, renewing or undertaking projects. We recommend seeking advice from your insurer to ensure that you are covered if the worst-case scenario happens however unlikely that might be. As ever this blog is meant to give general opinion. We are not experts on insurance nor valuations for these purposes. If you are an AB Client and would like to discuss your current requirements do contact our block property managers who will be happy to assist.
