Reinstatement cost is what it would cost to rebuild the property from scratch to its current specification, including demolition, site clearance and professional and statutory fees, but not the value of the land. Market value is what a willing buyer would pay on the open market. The buildings insurance sum insured should be based on reinstatement cost.
Reinstatement cost is not the same as market value
One of the most common misunderstandings in property insurance is the difference between reinstatement cost and market value. They measure fundamentally different things, and confusing them can lead to serious underinsurance or overpayment of premiums.
What reinstatement cost means
Reinstatement cost is the amount it would cost to completely rebuild a property from scratch to its current specification. It includes demolition, site clearance, construction, professional fees, statutory fees, VAT where applicable and an allowance for inflation during the rebuild period. It does not include the value of the land. This is the figure that should be used as the buildings insurance sum insured.
What market value means
Market value is what a willing buyer would pay for the property on the open market. It is influenced by location, land value, demand, comparable transactions and economic conditions. In London, market value is often significantly higher than reinstatement cost because of the high value of the land. In other areas, particularly for large commercial or industrial properties, reinstatement cost can exceed market value.
Why the difference matters
If a building is insured for its market value rather than its reinstatement cost, it may be over-insured in some cases (paying unnecessary premiums) or under-insured in others. Underinsurance is particularly dangerous because insurers may apply average, meaning they only pay a proportion of any claim. A regular professional reinstatement cost assessment ensures the sum insured is accurate.
When to get an assessment
A full reinstatement cost assessment should be carried out every three years and index-linked annually between assessments. It should also be updated after major alterations, extensions or changes of use. For residential blocks, managing agents should ensure the assessment is kept current as part of their duty of care to leaseholders.
Frequently asked questions
What is a reinstatement cost assessment?
A calculation of what it would cost to rebuild the property from scratch, including demolition, construction, fees and inflation. It sets the buildings insurance sum insured.
Why is reinstatement cost different from market value?
Market value includes land value and is influenced by location and demand. Reinstatement cost is purely the physical rebuild cost. In London, market value usually exceeds reinstatement cost due to high land values.
What happens if my building is underinsured?
The insurer may apply average, paying only a proportion of any claim. If insured for half the true reinstatement cost, you may only receive 50 percent of a claim.
How often should a reinstatement cost assessment be updated?
Every three years with annual index-linking. Major alterations or extensions should trigger a fresh assessment regardless of timing.
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Savas Bulduk
BSc (Hons) MRICS, Director & Chartered Building Surveyor.
Writes on Building surveying, Fire safety and facade, External wall systems, Technical due diligence, Contract administration. See the full team profile.