Rebuilding Costs And Property Insurance: Check Your Sum Insured
October 20, 2022No one will need any reminding about the turbulent economic environment in which people live and businesses operate.
The impending recession on the international scene, together with inflation and the rising cost of living at home, makes it more important than ever that you check the total sums insured of any property you own – whether residential or commercial.
The background
A host of powerful crosswinds has buffeted the UK economy. First, there has been Brexit and the impact – described by the Investment Monitor on the 7th of April 2022 – the departure from the EU has had on the cost of construction supplies and especially building materials such as cement, bricks, and labour costs.
The Investment Monitor shared forecasts by the Building Cost Information Service (BCIS) Materials Cost Index that construction materials such as these will have more than trebled by the end of 2022.
The impact of Brexit has been exacerbated by the economic impact of the Covid pandemic and its successive lockdowns. Where building materials were rising in price at a more or less steady rate of 0.9% in 2020, by 2021 that rate of increase had shot up to 4.8% – a level previously avoided for the past 40 years says the Office for National Statistics (ONS). According to current forecasts, the Building Cost Information Service (BCIS) Materials Cost Index is expected to reach 17.5% by the beginning of 2023.
With the economy still reeling from the impact of Brexit and the post-pandemic struggle, construction costs – along with practically every other sector of the domestic economy – have more recently been hit by globally-fuelled inflation and the impact of the war in Ukraine.
Why it matters
What does all this have to do with maintaining effective insurance cover for any commercial, buy to let property or home you own?
Construction costs – and the escalating price of building materials and labour – are absolutely critical to your insurance cover. After all, your property insurance is designed to provide you with indemnity against the financial losses of damage to your property.
If your property is damaged, you will be looking to your insurance policy for the necessary compensation to repair or reinstate the structure and fabric of your damaged property. In the worst-case scenario, of course, you might be facing a total loss from which your property will need to be completely rebuilt.
Your total building insurance cover will determine the maximum settlement that your insurer is obliged to grant in respect of your claim for damage – or, indeed, a total loss of your property.
In a climate in which those reconstruction costs are rising anything like the 17.5% forecast above by the BCIS Material Cost Index, you risk becoming seriously underinsured – the total building sum insured will be insufficient to cover the escalating costs of construction repairs, reinstatement, or wholesale rebuilding.
Calculating the costs of reconstruction
The various indexes used for the calculation of current building and construction costs typically distinguish between residential and commercial property.
With respect to residential property, for instance, the Association of British Insurers (ABI), in conjunction with the Royal Institute of Chartered Surveyors (RICS), maintain the BCIS Residential Rebuilding Cost Calculator – which is free to use on a personal basis for up to four calculations each year.
In addition, there are a wide range of subscription services with respect to residential property, including a home rebuild cost calculator and BCIS’ current Schedule of Rates.
If you own commercial property, however, manage a group of properties, are engaged in insuring such property, or offer professional services as a surveyor, you will need to use one of the BCIS subscription services.
Details about subscribers’ use of the Commercial Reinstatement Costs tool, BCIS Online (to help in the preparation of top-level cost plans), and BCIS Review Online (for reviewing your building costs) can be found on the website maintained by BCIS.
Summary
There is little doubt that construction costs have been significantly affected by momentous economic headwinds – from Brexit to the Covid pandemic, global inflation, and the war in Ukraine.
When construction costs are escalating at current rates, you run the risk of becoming significantly underinsured unless you take care to review and reassess the total building sum insured on any commercial or residential property you own or for which you have a responsibility.