Millions of home-owners who are diligently paying for property insurance are at risk of being deeply left out of pocket if disaster strikes, we can reveal.
In some cases, homeowners could be left without any cover at all if their homes burn down or need to be rebuilt from scratch. This is because an estimated nine in ten homes have under-estimated the amount of cover they need for 'rebuilding' costs. This is largely because the cost of rebuilding a home has soared by 18 per cent over the past 12 months — the fastest rise since 1980.
The average semi-detached three-bedroom home now costs £53,000 more to rebuild than it did in February 2022 — at a total cost of £347,800, according to the Building Cost Information Service (BCIS), which provides cost and price data to the Government and regulators. The dramatic surge is largely down to an increase in the cost of materials, with insulation up by 62%, uPVC windows (a highly popular type) 49% higher and plasterboard costing 46% more.
The price of cement has also increased by 34%, bricks 28% and blocks 26%, while a shortage of skilled workers has added a further 5% to project costs.
Andrew Chalk, a home insurance specialist at wealth manager NFU Mutual, estimates that 'millions' of people are at risk of underinsurance, which is when a homeowner pays for insurance but is not covered for the full value of their home if disaster strikes. This is because the insurance value of a property isn't based on its mortgage valuation or a percentage of its market value.
Instead, it is about how much you would need to rebuild the home from scratch, which will depend on the size, age, location and type of property you have. Various costs including demolition, debris clearing, architect fees, planning costs and installation of plumbing, electricity, ventilation and gas are all taken into account.
So, a family with a three-bedroom home which has an insurance policy that covers them for £284,500 — last year's rebuild cost — would be 18 per cent underinsured today. For example, if a flood meant they needed £20,000 worth of repairs, their insurer would pay out just 82% of that — £16,400.
The risk is particularly high for those who haven't changed their rebuild cost cover in years. Mr Chalk said, 'anyone in older properties, listed buildings or with unusual construction such as thatched roofs should remember the cost of reinstatement is likely to be more due to the specialist skills and equipment needed.'
Do you need to worry about your building insurance?
Many of the largest insurers now offer blanket coverage of a set amount, such as £500,000, £1 million or sometimes unlimited. In this case, homeowners are likely to be fully insured and do not have to worry about rising costs. However, there are still millions of people who do not benefit from this blanket coverage, the experts say.
According to price comparison site Comparethemarket, it costs £12 more each month to take out buildings and contents insurance that covers you on rebuilding costs of between £450,000 and £500,000, compared to cover for £350,000 to £400,000. Will Molland, of the property value assessors Rebuild Cost Assessment, said, "on average buildings are insured for just 66 per cent of what they should be and that fewer than one in ten household properties in the UK are insured for the right amount. Private homes and many buy-to-let investment properties have been affected by higher rebuilding costs, particularly for homes insured for around £500,000. Our data shows that these properties are usually only insured for half the amount they should be.'
Could you be left out-of-pocket... or without cover?
Insurance claims management company Salmon Assessors has seen a surge in the number of families severely underinsured. In one recent case seen by Jeff Salmon, founder of Salmon Assessors, a young married couple in Stanmore, Middlesex, have been left tens of thousands of pounds out of pocket after realising they were not covered for the full value of their home when it was too late.
The schoolteachers' flat burned down due to an incident with candles during celebrations for the Indian festival Diwali. They made a £220,000 claim but found that they were 30 per cent underinsured, according to their home insurance provider. After extensive negotiations, the firm agreed to the home cover being just 10 per cent short, which means they had to fork out £22,000 from their own savings
However, in more extreme cases of underinsurance it is common for the insurance provider to revoke its cover and reimburse the cost of the policy with no payout, Mr Salmon says.
Adam Holland, of insurance giant Axa, said, "that high inflation means there is an increased risk that people will miscalculate the value of their property. It is important not to assume you have the right level of cover, because the onus is on the homeowner to make sure they are adequately insured.
How to work out rebuild costs
To get an idea of how much your property could cost to rebuild, you can use the BCIS online residential rebuilding cost calculator, which allows you to make four free calculations per year.
To use it properly, you should work out your home's floor area before starting. You can find the calculator here: calculator.bcis.co.uk.
You can also hire a chartered surveyor for an assessment. If you have recently bought your home then the rebuild cost will be on your mortgage valuation or deeds. One of the biggest mistakes made when estimating rebuilding costs is when people simply use their purchase price or give their perception of the current value of their home, instead of how much it would cost to build it from the ground up, Mr Holland said.
Improvements, such as a new kitchen, extensions or underfloor heating will also drive up the rebuild cost. It is important to inform your insurer of any changes if you want to be properly covered in the event of an accident.