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The Difference in Market Value and Reinstatement Value


Understanding insurance can be a little daunting for people who don’t deal with it day to day and just want the cheapest quote to give them peace of mind that their home is safe.

This means we all need a simple way of explaining the issues around insurance and why some people feel like they’ve lost out. It’s all in the legislation, and it’s in the legislation for a reason, to protect the insurer and the insured.

First thing is first.

There has been a terrible house fire caused by arsonists, the tenant in one of your houses is waiting for you to come and give them a new home and make everything better. Now of course you are insured and you ring your insurance company up, but they tell you it will cost more than the house is worth to rebuild.

This is where the difference in market value and reinstatement value is introduced. It all depends on where your house is and how much it is worth. You may own an expensive property in the middle of farm land, or a terraced house in the middle of a city, you would be surprised at how the circumstances can alter the claim.

There are numerous factors which you have to consider. Damage to a terraced house means ensuring the surrounding houses are also safe, it involves a lot of work involving the whole street. This means a shorter time frame and more too do such as checking for dangerous materials like asbestos.

Damage to the new built property in the farmland means the house can taken away and replaced without having to consider neighbours or toxic materials.

So yes, you may end up paying more to rebuild a house which, on the market, cost half the price of a luxury farm house. This does not mean that in every instance it will be easy to rebuild new detached houses, it does mean that this legislation is in place for a reason and it should be thought through in detail.

Now you need to speak to your insurer and understand the risks which can apply to your specific property.

Lets go through a few.

  • The amount of cover required may not reflect the actual costs of completely rebuilding your property should the worst happen - buildings cover should also typically include costs of demolition, site clearance, legal searches, architects and planning fees and the like;
  • You also need to include a realistic figure to cover the costs of replacing your fixtures and fittings;
  • If you are looking for contents cover as well, then it may be a good idea to go through every room taking a careful note of its contents and their value - you may be surprised at the total you come to;
  • Don't forget to make a special note of the most expensive individual items that you may wish to cover, as these may need to be listed separately on your policy;
  • Depending on your property and contents, you may wish to consider market value replacement cover rather than new for old;
  • If you are using figures that you worked out some time back, for example an old mortgage valuation then remember to make some allowance for inflation in your calculations;
  • It is important from the outset not to get too hung up on the price of your cover - it is far more important to get the protection that you need;
  • If your property, fixtures, fittings and contents have been undervalued to keep premium costs down, then you'll typically find that you will be facing an equivalent shortfall in any claim settlement - a funding gap that you will need to fill from your own resources;
  • At UKinsuranceNET we are only too aware of all these things and will be pleased to help you avoid trouble through our expertise. We'll offer guidance and suggest some excellent websites you can use to correctly assess the value of your asset to ensure that you find the policy which gives you the optimum balance between cost and cover provided.

Following a claim on a policy, the last thing any property owner needs is the realisation that the claim settlement is not going to cover the actual costs involved to put things right. That few pounds saved on premiums through underinsuring when trying to keep costs down, may turn out to have been a bit of a false economy.

What now?

The valuations are conducted to take all factors of the property into consideration and come out with an accurate figure. As a landlord it is up to you to make sure you have this figure, so if the worst should happen, you are fully prepared.

Don’t forget to take into consideration economic figures; changes in inflation may alter the original values of the property. One of the confusing things about it seems to be if you are under insured.

You see if you have an insurance policy which covers 50% of loss, then your insurer will only pay 50% of the claim. This means that even if you are half covered for £10,000 and your claim is worth £5000, your insurer will then still only pay £2500 towards your losses.

It is vital to get a correct reinstatement value and have full cover to avoid paying out more than you bargained for.

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