In partnership with RebuildcostASSESSMENT.com
Insurance can sometimes feel like a puzzle, full of jargon and complex terms that make it hard to navigate. Understanding the difference between rebuild cost and market value is one area that often causes confusion, but it’s an important distinction to get right.
As specialists in Block of Flats Insurance and Landlord Insurance, we’ll unravel these important terms and show you why they matter when it comes to your property insurance.
Rebuild cost vs market value
The difference between market value and reinstatement value (or rebuild cost, as it’s also known) are really important, especially when it comes to insurance.
- Market Value: This is like the price tag your property would have if you wanted to sell it today. It considers factors like location, demand, and the area. It’s what someone would pay for your property in today’s real estate market.
- Rebuild Cost: This is the amount of money you’d need to completely rebuild your property if it was destroyed. It covers everything, including the cost of materials, professionals like architects and chartered surveyors, and removing the remains of your old property. It’s like starting over, rebuilding your home or commercial property from the ground up.
Why is reinstatement cost often lower than market value?
Now, you might be wondering, why is the rebuild cost often lower than the market value? It’s a great question. Several things contribute to the rebuild cost being lower than the market value:
- Regional Variations: Consider where your property is located. Regions like London and the South East often have pricier properties than the North. When it comes to insurance, this means that in high-value areas, the cost to rebuild your property may be less than its market value. That’s because rebuild cost focuses on the structure itself, while market value factors in location and demand. So, depending on where you are, the reinstatement cost could be lower compared to the market value.
- Special Features: Sometimes, the market value of a property includes extra bells and whistles, like a landscaped garden or a popular location. Rebuilding your property from scratch doesn’t necessarily mean replicating all these features, which can bring the cost down.
- Land Value: The market value includes the price of the land your property sits on, which can be a significant portion of the overall value. In contrast, the rebuild cost focuses on constructing the building itself.
Although many people assume that insuring their properties for the market value is enough, that’s often not the case. That’s why it’s so important to understand the difference between market value and reinstatement cost.
One of the main reasons for these assumptions is the use of free online rebuild cost calculators. They might seem useful, but they often ignore important things like listed status, building type, or local costs, and this can cause serious underinsurance.
Can reinstatement cost be higher than market value?
Reinstatement cost can be higher than market value in some situations, like:
- Listed Properties: Historic or listed properties often require very careful restoration using specialised materials and craftsmanship. These unique requirements can drive up the reinstatement cost beyond the market value.
- Lower Than Average Housing Prices: In regions where property market values are relatively low, but construction costs, materials, or labour expenses remain high, the reinstatement cost may be higher than the market value.
- Unique Architectural Features: Properties with distinctive or intricate architectural features may incur higher reinstatement costs due to the need for specialised artisans and materials to recreate those features.
- Rare or Expensive Materials: If your property incorporates rare or expensive building materials, such as imported stone or antique wood, replacing these can significantly increase the reinstatement cost.
In these kinds of cases, having an accurate rebuild cost assessment becomes even more critical to ensure your insurance coverage adequately protects your property, even when the reinstatement cost exceeds its market value.
Impact on insurance premiums and cover
When you insure your property, the value you choose to insure it for directly affects your insurance premiums and coverage.
Here’s how it works:
- Insuring for Market Value: Opting to insure your property for its market value could actually result in lower insurance premiums. However, there’s a catch. If a disaster occurs, your insurance settlement may only cover a portion of the rebuilding cost, potentially leaving you with a significant financial burden.
- Insuring for Rebuild Cost: Choosing to insure your property for the rebuild cost ensures that you’ll receive adequate coverage in case of damage or loss. While your premiums might be slightly higher, you’ll have peace of mind knowing that your insurance will fully cover the cost of rebuilding, even if it exceeds the market value.
Why accuracy matters when it comes to market value vs rebuild cost
Imagine you’ve insured your property for an amount significantly lower than its rebuild cost. A disaster strikes, and the damages are extensive. Suddenly, you’re faced with the grim reality that your insurance settlement won’t cover the full cost of rebuilding. We discussed this in our recent blog, “What is The Average Clause in Insurance?”
On the flip side, suppose you’ve accurately assessed your property’s rebuild cost. In that case, you can rest easy, knowing that your insurance will provide the necessary funds to rebuild your home or commercial property, regardless of whether it exceeds the market value. Accurate rebuild cost assessments act as a safety net, protecting you from financial setbacks if the worst were to happen.
Get a property valuation today with RebuildcostASSESSMENT.com
Here at Lansdown, we can offer a desktop, enhanced or site valuation for your property in partnership with RebuildcostASSESSMENT.com*.
Simply fill out the form below or find out more here.
Please call us on 01242 524498 or email us at enquiries@lansdowninsurance.com if you have any questions and our team will be happy to help.
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About Lansdown Insurance Brokers
Lansdown Insurance Brokers are specialists in Landlord Insurance and Block of Flats Insurance. We can provide policies tailored to your needs and offer guidance on the necessary cover required.
Lansdown is part of the Benefact Group, a charity-owned, international family of financial services companies that gives all available profits to charity and good causes.