Why Rebuild Costs Matter: The Hidden Risk in Property Insurance

Do Rebuild Costs Matter?

For most people, when thinking about insuring a property, they naturally focus on its market value — what it would sell for today. But when it comes to insurance, market value is almost irrelevant, and the figure that truly matters is the rebuild cost.

This is one of the most misunderstood areas of property insurance, and yet it really is the foundation of whether your cover will respond properly in the event of a claim - very important indeed!

What Is a Rebuild Cost?

A rebuild cost represents the amount required to reconstruct your property from the ground up following a total loss, such as a fire. It is not influenced by the housing market, local demand, or what you originally paid for the property.

A professional Rebuild Cost Assessment (RCA) calculates the full cost to:

• Demolish and clear the site

• Rebuild the structure

• Use materials and construction methods equivalent to the original

• Comply with current building regulations

• Cover professional fees (architects, engineers, surveyors)

• Account for site access challenges and regional labour costs

• Grade listed building can often have a more complex set of requirements

This figure is technical, detailed, and often surprising — which is why so many properties end up incorrectly insured.

The Scale of the Problem

Industry research shows that:

• 9 out of 10 UK properties are insured for the wrong amount

• 70% are underinsured

• 23% are overinsured

Underinsurance is the most damaging because it directly affects how much an insurer will pay out during a claim. Overinsurance, on the other hand, means you may be paying higher premiums for no additional benefit.

How Underinsurance Affects Claims: The Condition of Average

To understand the impact, let’s look at a real-world example:

Mr Pineapple owns a block of 8 flats. He insures the building for £500,000. After a fire, the insurer obtains a professional valuation and discovers the true rebuild cost is £1,000,000.

This means the property was insured for only 50% of its actual rebuild cost.

Under something called the 'Condition of Average', the insurer is entitled to reduce the claim payout proportionally.

With some policies, insurers will remove this payout reduction if the property has a Rebuild Cost Assessment by a RICS surveyor, obtained within the previous 3 years -making an up-to-date assessment and figure very important as it shows that you have taken professional advice to ensure this is accurate.

Total Loss example:

• True rebuild cost: £1,000,000

• Declared value of cover on policy: £500,000

= Underinsurance: 50%

The insurer will only pay 50% of the claim, meaning Mr Pineapple receives £500,000 — half of what he needs to rebuild.

Partial Loss Example:

Even smaller claims are affected - if the damage totals £250,000, the insurer can still apply the 50% reduction:

• Insurer pays: £125,000

• Mr Pineapple must fund the remaining £125,000 himself

In effect, he becomes his own insurer for the portion he failed to cover.

Why Getting It Right Matters

A correct rebuild cost ensures:

• Your insurance responds fully when you need it

• You avoid unexpected financial shortfalls

• You’re not overpaying for unnecessary cover

• Your policy reflects current building regulations and construction costs

How To Make Sure You Get it Right

Given how frequently rebuild costs are miscalculated, a professional assessment is one of the simplest and most cost-effective first steps to protect your property investment. At Mango Insurance Brokers, we often run into cases where there have been oversights around the declared value for a property owner's insurance policy, and we understand that it can be tricky without the right guidance. With our experience and expertise, we can help you see things clearly and be confident you are completely covered should the worst occur!