Danger of under-insuring your self-build project
When completing a self-build insurance policy proposal form, your budget (the theoretical build cost) will be prevalent in your mind as it’s what you intend to build the project for. But beware, because this is when you need to think hard about what would happen if you are hit by a serious loss.
At Protek, we always ask the customer to provide us with a Professional Reinstatement Cost. That is; the amount of money it would cost to professionally reinstate the project using a main contractor, should it be destroyed by a fire say two days prior to completion. The reason for this is simple; if the customer insures for their expected build cost, it will be a lot less than the cost of using a main contractor (that is the inherent attraction of self-build after all) and not enough to rebuild quickly from a major catastrophe.
Sadly this under-insurance problem doesn’t raise its head until a catastrophic loss hits, then the self-builder can quickly find themselves without sufficient funds to get the property rebuilt quickly using professionals. Instead they will be faced with the fact that costs have escalated during the build, they may have zero spare financial resources but will need to self-build the whole project again on a very limited budget.
The problem is exasperated when the project involves an existing structure. A barn conversion will need cover for the professional reinstatement cost of the existing retained elements as well as all the new conversion works and these can be quite difficult to assess.
All these factors can put a huge strain on the self-builder, but are easily averted through professional assessment of the correct reinstatement cost.
How to work out the correct build cost for your sum insured
Your sum insured should be carefully chosen to reflect the gross cost of professional labour and materials together with the costs for site clearance, debris removal and professional fees. If you have a turnkey price from building contractor for your project this will be a good indicator on a new-build project, alternatively you could use a build cost calculator from the Royal Institute of Chartered Surveyors (RICS).
Before you use the calculator you’ll need to know your home’s external floor area for both upstairs and downstairs: this will give you the rebuilding cost per square metre. There are limits to using the rebuild cost calculator as it doesn’t work on every build method.
If there is an existing element forming part of your project, then this will need to be considered very carefully and it’s advisable to use a building surveyor who will be able to fully assess the hidden cost of rebuilding – especially if the property is listed.
In some situations a self-builder’s build cost could be as much as 30% cheaper than a professional reinstatement and while Protek Self Build cover provides an element of automatic increase in sum insured, this can be quickly wiped out as the project goes over budget. For this reason you should reassess your reinstatement cost regularly during the build.
In the grand scheme of things, the effect of reinstatement cost on the premium shouldn’t be your focus. If you suffer a loss and are found to be under-insured by say 50%, your claim can be reduced by 50% (being the amount of under-insurance) which could result in a bad situation becoming much worse.
It’s important to bear in mind that rebuild costs have absolutely nothing to do with the land value or the market value of a property upon completion. If your mortgage lender asks you to insure for the market value of the completed property, then it’s worth pulling them up on it.
Protek Self Build provides self-build insurance cover and 10-year structural warranty products to the self-build market.