Getting Rebuilding Costs Right to Avoid Underinsurance

With inflation still being challenging and prices being driven up across all sectors of the economy, landlords should be aware that rebuilding costs may be higher than expected. This means that when making a claim, many will find themselves underinsured and left to pay the difference themselves.

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Why are accurate rebuilding costs important?

As a landlord, it is your responsibility to make sure that your property is insured for the correct amount. Landlord insurance is calculated on the valuation of the rebuilding cost of your property back to its original state. This valuation is different to the market value. There are several factors that drive up rebuilding costs including:

  • If the valuation is built on the original developers cost, it may be too low if the developer costs benefited from economies of scale.
  • Listed buildings and properties with significantly higher specifications or eco features will add extra costs to the rebuild.
  • The additional costs to demolish the property, clear the site and the associated surveyors’ and architects’ fees need to be considered.
  • Outbuildings, driveways, boundary walls, fences and gates, paving and security lighting should be factored in.

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What is driving up rebuilding costs for landlord properties?

  • Inflation - the prediction is that consumer prices are expected to increase by 5.7 percent in 2022 in advanced economies and 8.7 percent in emerging market and developing economies (Note 1).
  • Covid -19 - created supply issues with factories being closed, restrictions imposed at ports, congestion in shipping, container shortages and staff absence due to illness.
  • Construction materials shortages – international shortages in timber, steel, cement, metals and plastics have soared. Iron ore for example has seen an 88% price increase over the past 12 months with timber, steel and plaster all increasing by 20-30% (Note 3).
  • Growth of housebuilding and infrastructure projects - is creating higher labour costs. To combat rising costs many contractors are submitting several price variations mid-contract.
  • Overtime on projects – with all the issues above, projects are taking longer and requiring labour overtime creating a much higher cost than originally anticipated.)

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Why do rebuilding costs have a bearing on underinsurance?

If you get the rebuilding cost wrong and it is lower than the actual rebuilding reinstatement cost, then you are at risk of being underinsured. This means that if the worse was to happen and you have to make a claim you will only receive a proportionate percentage of the claim amount from the insurer. This is known as the average condition.

To illustrate how this works: an insurance policy covering a landlord’s property is based on a sum insured of £100,000. Unfortunately, following a flood the landlord had to make a claim on the buildings insurance for a damaged kitchen at a cost of £10,000. However when the claim was made, the correct rebuilding value of the property was £200,000 . This meant that the property was underinsured by 50% when compared with the actual sum insured in the policy. The claim payment was then reduced proportionately by 50% with the landlord only receiving a payment of £5,000 – which is only 50% of the value of the loss suffered.

It is, therefore, very important that your property is insured on an up to date ‘rebuilding value,’ and this figure should be regularly revalued at least every 2/3 years.

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What can I do to get an accurate rebuilding cost and mitigate underinsurance?

There are various ways that residential landlords can calculate the rebuild cost, but the easiest way is to use the online calculator from British Construction Information Services (BCIS ) to determine an accurate rebuilding cost of your property. 

This will calculate you the exact rebuilding cost. It only takes a couple of minutes to register and answer a few questions on your property - including year built, storeys, postcode, floor area, number of rooms, roof and wall type. Alternatively, you can contact us on 0344 346 0307 with your details at hand and we will do the calculation for you. It is so important that you get it right so that you have adequate cover should you suffer a loss and have to claim,

Once you have done so, you should contact us to update your policy.

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Landlords insurance from Towergate

At Towergate, we can cover a wide range of rental properties and types of tenants including multi occupancy, students, and local authority placements. Our policies can include cover for loss of rent, loss of keys, accidental damage, alternative accommodation costs, and more.

You can compare prices from a range of leading insurers, as well as add-ons such as landlord home emergency insurance.

Take a look at our landlords insurance page for more information.

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About the author

Alison Wild Bcom Hons MAAT MATT Taxation Technician Commercial Tax Pensions Insurance And Marketing Specialist AuthorAlison Wild BCom (Hons), MAAT, MATT, Taxation Technician is a highly respected industry professional who has been working with and advising SMEs in areas including tax, pensions, insurance and marketing for over 25 years. She is a member of the Association of Accounting Technicians (AAT) and Association of Tax Technicians (ATT) and also has 20 years' experience as a residential landlord.

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  1. IMF 9 April 22
  4. Director Will Molland MCIOB AssocRICS