A reinstatement cost is what it would cost to fully rebuild a property, including demolition, professional fees and meeting current building regulations, not its market value. Setting the buildings sum insured to that figure is what avoids underinsurance. A reinstatement cost assessment, usually carried out by a RICS surveyor using BCIS rebuilding cost data, establishes the figure properly, and it matters because the average clause can cut a claim in proportion to any shortfall.
Underinsurance is one of the most common and costly mistakes in property insurance. It usually comes not from carelessness but from guessing the rebuild figure, confusing it with market value, or letting it drift as building costs rise.
What is a reinstatement cost?
It is the full cost of rebuilding the property from scratch after a total loss: demolition and site clearance, materials and labour, professional and architect’s fees, and the cost of complying with current building regulations, which can be higher than the original build. It is not the price the property would sell for; market value and rebuild cost can differ substantially in either direction.
What is a reinstatement cost assessment?
A reinstatement cost assessment is a professional calculation of the rebuild figure, typically carried out by a chartered surveyor working to RICS standards and drawing on BCIS rebuilding cost data. It is the reliable alternative to guessing or using an online estimate, and is particularly important for non-standard, listed, larger or commercial buildings, where generic figures are least accurate.
What is the average clause and why does it matter?
If a building is insured for less than its full reinstatement cost, the average clause lets the insurer reduce a claim in the same proportion as the underinsurance. A property with a 500,000 pound rebuild cost insured for only 250,000 pounds is half insured, so a 100,000 pound claim could be cut to 50,000 pounds. It applies to partial losses, not just total ones, which is what makes underinsurance bite even on everyday claims. Our guide to underinsurance and the average clause explains the mechanism in full.
How do I keep the sum insured accurate?
Base it on a proper reinstatement cost assessment rather than a guess or market value, make sure the policy applies index-linking to track building cost inflation, and have the figure reviewed periodically, especially after extensions or improvements. Index-linking helps, but it does not fix a figure that was wrong to begin with.
Getting the cover right
The rebuild figure is the foundation of a buildings policy, and getting it right is the single most effective defence against a reduced claim. A broker can help make sure the sum insured reflects a proper reinstatement cost. To review your property cover, call 01795 841 310 or speak to the team.
Underinsurance and average explained
If your buildings sum insured is lower than the true rebuild cost, your claim can be cut, even for partial damage. This is underinsurance, and the tool insurers use to reduce the payment is called average.
An average clause reduces a claim in proportion to the shortfall. The calculation is:
Claim paid = loss x (sum insured / true rebuild cost)
The effect is worst on partial losses. Many owners assume a low sum insured only hurts them if the whole building is destroyed. Average means it reduces every claim.
A worked example of average
This example is hypothetical. A commercial unit is insured for £750,000, but a reinstatement cost assessment would have put the rebuild cost at £1,000,000. A fire causes £200,000 of damage.
| Item | Figure |
|---|---|
| True rebuild cost | £1,000,000 |
| Sum insured | £750,000 |
| Proportion insured | 75% |
| Damage | £200,000 |
| Claim paid after average | £150,000, less the excess |
The owner pays the missing £50,000 and the excess themselves, even though the damage was well within the sum insured.
How the law treats underinsurance
For businesses, the Insurance Act 2015 requires a fair presentation of the risk. If the insurer would have charged a higher premium had it known the correct figures, it may reduce the claim proportionately. If it would not have offered cover at all, it can avoid the policy and return the premium. A deliberate or reckless breach allows it to refuse all claims and keep the premium.
For householders, the Financial Ombudsman Service looks at what the insurer asked and whether the answer given was reasonable. It says it is unlikely to find it fair to apply average without a clearly worded term in the policy. If the rebuild figure was unreasonable and the insurer would have charged more, the claim may be reduced in line with the proportion of the premium paid.
How a rebuild valuation is done
A reinstatement cost assessment is carried out for insurance purposes only. It has no direct relationship to market value. A surveyor will usually:
- Inspect the building. Measure the floor areas and record the construction, the specification and any special features such as listed elements, basements or unusual roof structures.
- Apply rebuild cost data. Surveyors often use cost data from the Building Cost Information Service as a guide, adjusted using professional judgement for the region and for anything above average. For unusual or historic buildings, a detailed elemental breakdown may be more appropriate.
- Add the extras. The assessment should include allowances for demolition, professional fees and statutory fees, such as planning and Building Regulations approval. Hazardous materials such as asbestos can add time and cost to demolition.
- Report a declared value. The figure you give your insurer, which the report should state is for insurance purposes only.
Most buildings in the UK are insured on what is known as a day one reinstatement basis. The declared value reflects the cost of rebuilding the day after the damage, and the insurer adds a provision for construction inflation over the time it takes to design, gain approval, tender and rebuild. Because the declared value ignores age and condition, claims can be settled on a new for old basis.
Who needs a reinstatement cost assessment
- Freeholders and management companies insuring a block of flats, where leaseholders rely on the sum insured being right.
- Owners of listed, thatched or older buildings, where traditional materials and specialist trades can push rebuild costs well above a standard estimate.
- Landlords with portfolios, where one undervalued property can expose the whole policy. See our guide to landlord insurance.
- Owners of commercial premises such as warehouses, shops and offices. Our commercial property insurance guide covers the wider policy.
- Holiday let owners with converted barns or cottages. See holiday let insurance.
- Anyone who has extended, converted or refurbished since the sum insured was last set.
How often to revalue
An article in the RICS journal recommends an annual desktop review to reflect inflation, with a full reassessment every three years. You should also revalue sooner after:
- An extension, loft conversion or change of use.
- A significant refurbishment or upgrade in specification.
- The building being listed, or being found to contain asbestos.
- A sharp rise in local building costs.
Looking for buildings cover with the right sum insured?
Tell us what your business does and we will look for cover that fits. Call 01795 841 310 (Monday to Friday, 9am to 5pm) or send us your details and we will come back to you.
Index linking: what it does and does not do
Many buildings policies are index linked. The sum insured is adjusted at renewal, usually in line with a building cost index, so the figure keeps pace with general rebuild cost inflation.
Index linking only moves the figure you started with. If the original sum insured was wrong, index linking carries the error forward each year. It also cannot reflect changes to the building itself, such as an extension. A periodic assessment resets the starting point.
What happens at claim time
- Notify the insurer and make the building safe.
- A loss adjuster visits for larger claims and assesses the damage.
- The sum insured is checked. On a significant claim, the adjuster will often check whether the declared value was adequate.
- Average is applied if the building was underinsured and the policy contains an average term.
- Settlement follows, less the excess. A recent reinstatement cost assessment on file is strong evidence that the figure was reasonable.
Frequently asked questions
Is rebuild cost the same as market value?
No. Rebuild cost is what it would cost to demolish, clear and rebuild the building. It has no direct link to what the property would sell for and can be higher or lower.
How often should I get a reinstatement cost assessment?
A full reassessment every three years, with an annual desktop review in between, is the approach recommended in the RICS journal. Revalue sooner after any building work.
Does index linking mean I never need a valuation?
No. Index linking adjusts an existing figure for inflation but cannot fix a starting figure that was wrong or reflect alterations.
Can an online rebuild calculator replace a survey?
For a standard house it can give a starting point. The Financial Ombudsman Service notes that calculators do not suit all homes and depend on accurate inputs. Listed, unusual, commercial and multi-occupancy buildings usually need a surveyor.
What does average mean on my buildings insurance?
Average is a policy term that reduces a claim in proportion to any underinsurance. If you are insured for 75% of the true rebuild cost, you receive 75% of the loss.
Who pays for a reinstatement cost assessment?
The building owner, or the freeholder or management company for a block. For blocks of flats the cost is usually recoverable through the service charge if the lease allows.