Market Value vs Building Insurance Value


Q. There seems to be quite a discrepancy between the market value of my home and its insured value, and I’m concerned that I may not have adequate cover.

A. The market value of a property, and the value that is put on it for insurance purposes, are two very different things. Market value obviously reflects the price someone is prepared to pay for your home – which, as we all know, can go up, down or sideways, depending on a whole range of external factors. On the other hand, insured value is based on a calculation of what it would actually cost to completely rebuild your home to the same specification in the event of something like a major fire. Even in the current market, the former is almost always higher – primarily because the insured value doesn’t take into account the value of the land on which a property sits.

So, that’s where the discrepancy comes from – and in itself, it needn’t be a cause for concern.

However, whether or not the insured value is actually correct is another matter altogether. Generally speaking, insurance companies increase their valuations annually in line with inflation – but that won’t necessarily reflect the true cost of labour and materials at any given time. Besides, they may have got their sums wrong in the first place. Then again, you may have significantly extended or improved your home over the years, and unless you make a point of telling your insurers, they won’t have taken that into account.

As a general rule, I would advise you to check the insured value every 2-3 years. You can calculate this yourself by multiplying the total external size of your home (both upstairs and downstairs) by the estimated rebuilding cost per square foot or square metre, which can vary quite considerably, depending on where you live and the type of property you live in. These costs are published by the Royal Institute of Chartered Surveyors, and are available – at a price - from most qualified surveyors. Alternatively, you can check out the Association of British Insurers’ free online building insurance calculator.

Once you’ve done your calculations, compare the result with the insurer’s valuation, and if you’re not happy, ask them to make the necessary adjustment. It might mean you pay a slightly higher premium, but it’s a small price to pay for peace of mind.