Does my home insurance cover my building?

You may assume that it will because you have buildings insurance & you spent a long time on the price comparison sites searching for the cheapest premium.  However did you read through the small print, the terms & conditions before buying?  Do you understand the significance of rebuild cost?  If you didn’t then how are you sure you have the right cover?  This is your property, the roof over your family’s head and it really does deserve your attention.

If you blindly renew your home insurance for buildings & contents each year & have no clue about your home’s rebuild cost then you need to read on.

This subject, very much worth highlighting, came up last week with a client.  Your mortgage lender makes it a condition of the mortgage that you hold ADEQUATE insurance for the building.  In the olden days the policy was checked by the lender and assigned to your mortgage however nowadays the lender trusts you to do this yourself.

If you don’t do it right then you usually don’t find out until you have cause to make a claim.  At which point a disaster has likely occurred and the last thing you need is a voice on the phone saying “Sorry…..you are not covered for this………….”

When was the last time you checked your buildings rebuild cost?

This article focuses on having the right rebuild cost for your building.  This should be the foundation of your buildings insurance cover.

Usually when you obtain home insurance you are asked for the sum assured you need for your building & some insurers ask specifically for the rebuild cost.

The rebuild cost should be enough to rebuild your home if it were completely destroyed. Remember that the rebuild cost is not the same as the market value of your property. For example, if your home is listed and needs specialist materials and labour, the cost to rebuild it could be considerably more than its market price depending on where you live. Additionally, you need to factor in the costs of hiring professionals like architects and surveyors, the cost of demolition, debris removal and finding alternative accommodation for the duration of the work.  If your home is a standard build then the rebuild cost is likely to be less than the market value.

You can find the rebuild cost on your Home Report when you bought the property however if this is old (ie. older than 1 year) then a more up to date check can be made using the free public rebuild calculator.

You should be checking your rebuild cost at renewal every year because in recent years these costs have been affected by short supply of materials & labour.

The consequences of underinsurance as regards home insurance ie. your rebuild cost is wrong or out of date.

If you’re underinsured, it’s not as simple as getting a little less compensation. Instead, it can lead to an even greater gap between what you need and what you’re given. This is because some insurers apply the average clause.

What is the average clause in relation to home insurance?

Essentially, the average clause allows your insurer to reduce your payout by the percentage you are underinsured.

For example, let’s say your home is insured for £250,000 but its actual rebuild value is £500,000, then you would be underinsured by 50%. If you suffer a loss, such as a fire which causes £50,000 worth of damage then, using the average clause, your insurer would only pay out £25,000.

You’ll also need to pay the excess before any claim can go ahead, so the final payout is likely to be even lower.

The average clause might seem unfair, but it’s a way for insurers to protect themselves from policyholders who might intentionally underinsure their property to obtain a cheaper premium. Not all insurers use the average clause, but if they do it should be clearly set out in your policy documents.

This concept of underinsurance applies to your content’s insurance as well as your buildings.

House Fire Cost us £26,000 because Direct Line said we were underinsured for our buildings insurance.

This article in the Times is a recent real-life example (article featured in The Times 21/10/2023).  The couple had taken a policy with indexation increases on the rebuild cost so that each year at renewal the buildings sum assured increased with inflation as a protection against underinsurance.  However, the inflation increase on their policy of 7.8% was lower than building cost inflation at 19% leaving their cover short.  A fire occurred in their Buy to Let property when their tenants electric bike battery exploded.

Direct Line said: “All customers at renewal are asked to check that they believe all the information on the policy is correct, including the rebuild cost.”

So however shocking we think Direct Line’s behaviour has been in this case the bottom line is, it’s down to you.