The price paid for a property and the sum for which it should be insured are sometimes confused.
The correct sum for insurance is the amount that it would take to rebuild the property from scratch and this can obviously be very different from the purchase price. The importance of insuring the property for the correct sum is crucial in making sure that expectations are met if there is a claim and the full cost of restoration can be claimed.
Invariably the first time a client discovers that they are underinsured is after a substantial loss when the loss adjuster inspects the damage and reports the likely cost of rebuilding to the insurer; by that time it is too late. If the property is deemed to be insured for less than its full reinstatement value then the insurers have the right to apply Average. This means that the amount of the claim will be reduced by the same proportion that the property is underinsured. In simple terms a house that is insured for £1m when its rebuilding cost is actually £2m, could have any insurance claim for it reduced by 50%.
The best household insurers try to reduce the risk of underinsurance by providing their clients with a free reinstatement valuation. A surveyor will visit, establish a rebuild figure and once this sum insured has been agreed by both parties, the client will then benefit from Extended Replacement Cost (ERC) cover. ERC means that even if a claim exceeds the sum insured, the insurers will pay whatever the cost of reinstatement actually turns out to be. A potentially priceless benefit.
However, the insurers of farm & estate policies do not provide free reinstatement valuations or ERC and therefore the responsibility for ensuring that houses, outbuildings and farm buildings are covered at the correct values, remains with the insured. If in doubt it is definitely advisable to ask a land agent or other professional to conduct a reinstatement or rebuild valuation every five years or so to make sure that an insurance policy responds as intended if disaster strikes.