Home insurance – understanding market value versus rebuild cost
The terms “rebuild costs” and “market values” are frequently encountered in the context of home insurance.
However, they’re not always clearly understood so below the basic definitions and use of these terms is explained. It’s important to understand these because they may have a material effect on the cost of your home insurance and on any assessments made following a claim.
If a problem is sufficiently serious, say a major fire, then your home and property might be damaged beyond repair.
In such cases, it’s sometimes necessary to completely demolish what’s left of a property and rebuild it from the ground up. That is, of course, inevitably expensive.
Those costs might also need to cover things such as the full demolition of the original property’s shell and the removal of all materials. Surveyor’s and architect’s fees (etc.) also need to be taken into account when considering the rebuild.
The total figure here is referred to as the rebuild cost.
This is a typically much more familiar term.
It constitutes a figure that represents a realistic amount your property would sell for on the market at the time the valuation is taken.
Generally speaking, this valuation isn’t what the owner would hope they might get in a best-case scenario. It’s usually based upon a firm objective assessment by a professional, such as a surveyor and specialist property valuation expert and typically uses the definition of a “reasonably quick sale” in the current marketplace.
The relationship between the two
Typically, the rebuild cost is lower than the market valuation.
This sometimes surprises people but it’s worth keeping in mind that the market valuation is based upon many factors, some of which are intangible:
market demand for property in a given area – something which may have little relationship to the property’s rebuild cost in bricks and mortar terms;
market valuation also includes the value of the land the property stands on (or residual lease lengths) – two things which cannot typically be affected by damage and rebuilding.
There are though, some important exceptions which might mean things are reversed:
properties that are of special historic interest (listed);
homes that are constructed with old or specialist materials (e.g. a medieval barn conversion);
buildings in conservation areas where rebuild exactly as-was and with specialist materials, might push up the rebuild costs;
homes in areas which have, for whatever reason, suffered a large loss in market valuation levels.
Why these values are important
Your home insurance will normally include cover for the full rebuilding costs of your property (also sometimes called its “reinstatement cost”). Remember, this will typically be a figure that's lower than that you consider being the value of your home in the marketplace.
This cost will be arrived at following an inspection and survey by a qualified person – usually a surveyor. You will typically provide that to your home insurance providers.
In some situations, it might be advisable to revisit your reinstatement cost. That might apply if, for example, you’ve added an extension or put in a loft conversion.
Your local home insurance provider will usually be only too pleased to help advise you on where you can find expert total rebuild valuation assistance as it may be very important not to get this wrong.