Extending, refurbishing or upgrading a property can change more than its appearance or functionality. Significant alterations can also affect how much it would cost to rebuild the property following a major loss.
For property owners, this means the rebuild cost used to determine the buildings sum insured may need to be reviewed following material works.
Keeping this figure up to date is an important part of ensuring your property remains appropriately insured.
Why can property alterations affect rebuild costs?
A property's rebuild cost is an estimate of what it would cost to reconstruct the building following a total loss. This is different from its market value and takes into account factors including construction materials, labour, professional fees, demolition and site clearance.
When a property is altered, some of the assumptions underpinning an existing rebuild cost assessment may change.
For example, an extension increases the amount of building that would need to be reinstated, while a major refurbishment could introduce higher-specification materials, additional services or more complex construction.
Even where an insurance policy includes index linking, this is designed to reflect general changes in rebuilding costs over time. It cannot account for physical alterations made to an individual property.
What changes could prompt a rebuild cost review?
Not every improvement to a property requires a new assessment. However, material changes to the building should prompt consideration of whether the existing rebuild cost remains appropriate.
Examples can include:
- Extensions or increases in floor area
- Loft, basement or other conversions
- Significant changes to the roof or building structure
- Major refurbishment projects
- Additional kitchens or bathrooms
- Upgrades to heating, electrical or other building services
- Installation of fixed air conditioning or similar systems
- Replacement windows and doors where the specification has materially changed
- New or replacement cladding and changes to the external building fabric
- Significant changes to the quality or specification of fixtures, finishes or materials
The impact will depend on the nature and extent of the work, as well as the type of property involved.
What about minor improvements?
Routine maintenance and cosmetic changes are less likely to materially affect the rebuild cost of a property.
Redecoration, replacing floor coverings or carrying out minor like-for-like repairs, for example, would not ordinarily justify a new rebuild cost assessment on their own.
The important distinction is whether work has materially changed the size, construction, specification or complexity of the property.
Why does an accurate rebuild cost matter?
If the buildings sum insured does not accurately reflect the cost of reinstating a property, there is a risk of underinsurance.
Following a significant claim, this could mean the insurance available is insufficient to cover the full cost of reinstatement. Depending on the terms of the policy, underinsurance can also affect the amount paid towards a claim.
Regularly reviewing declared values and rebuild costs is therefore an important part of managing property risk, particularly following substantial investment or alteration.
Build the review into your property management process
Rather than waiting until the next insurance renewal, property owners and managers should consider whether significant works should trigger a review of the property's rebuild cost.
A useful question to ask is:
Has the property undergone any significant alterations, refurbishment or changes in specification since its rebuild cost was last professionally assessed?
If the answer is yes, it may be worth checking whether the existing figure remains appropriate.
This can be particularly important across larger property portfolios, where alterations may take place at different locations throughout the year and may not always be immediately reflected in insurance information.
How Clear Real Estate can help
Clear Real Estate works with property owners, investors and managing agents to help them understand and manage the risks associated with their property portfolios.
We work with specialist providers, including RebuildCostASSESSMENT.com, who provide professional rebuild cost assessments for residential and commercial properties.
RebuildCostASSESSMENT.com advises that material changes affecting areas such as a property's floor area, layout, roof form, services or specification can be reasons to consider reviewing its rebuild cost.
If you have recently altered or refurbished a property, or are unsure when its rebuild cost was last professionally assessed, speak to your Clear Real Estate Account Executive. We can help you consider whether further action may be appropriate.
