Building insurance: am I misunderstanding what it's meant to cover?

pawntoc5

Hi, I'm looking to purchase building/home insurance and was expecting insurers to offer coverage up to the market value of the property (per mortgage provider's assessment of its value, which tends to be similar/same as the purchase price). However, I'm looking at TSB's building insurance product and they ask for the "cost to rebuild", which of course is a much lower amount.

TSB has confirmed that in the worst case scenario where the building (where the flat is) is ruined and it needs to be rebuilt, the policy would cover up to the cost of rebuilding only and not the market value of the home. They said to the best of their knowledge, there isn't an insurance product on the market that offers coverage up to the market value of the flat/home.

Shouldn't there be an insurance product that covers up to the value (and not the cost) of the property (again, per mortgage report's assessment of value)? Rebuilding the home is a different matter. I don't want to be in a situation where, say, I paid £600k to buy the flat, but because the rebuild cost is only £180k that's the max that the insurer will pay out if the flat is gone because of fire/what not.

Can someone point me in the right direction for such a product if it exists please? Any clarification on the insurance market here would be much appreciated. Thanks!!

MovingForwards

But the insurance will put you back into the position you were before.

You would be given temporary accommodation to live in while it was rebuilt.

Once it was rebuilt you would have your home back.

What makes you think you would get the value of the property as the insurance?

It isn't like car insurance.

Quentin

You misunderstand

If there was a catastrophe and your property needed rebuilding then that's fine (assuming that you insured for the correct cost of rebuilding)

Bear in mind that the land wouldn't need buying !

davidwatts

Yes, absolutely, you are misunderstanding what it's meant to cover. You insure against the rebuild cost of the property. As explained above, in the worst case scenario, the flat is rebuilt and you are "indemnified" (put back in the position you were in before the damage occurred).

If they paid you the market value you could rebuild the flat and then have a massive profit on top, which is not how insurance is meant to work!

Brodiebobs

A big factor you seem to be missing is if the property is a flat and you are a leaseholder you wouldn't need to insure the building, unless you are the freeholder, or in Scotland.

However the rebuild value is exactly that, the cost to rebuild, or put you back in the position you we're before the loss, so youd have your buildings back and in theory its value would be the same.

If you've had a survey done a rebuild value is usually specified in there, however most mainstream insurers have standard sums insured now offer either £500,000 or £1 million to try and avoid under insurance.

eddddy

Another of your posts suggests you're buying a flat in London - so it would almost certainly be leasehold.

Almost always, the Freeholder arranges buildings insurance for leasehold flats - so you won't have to.

But occasionally, the lease will say that the leaseholder is responsible for buildings insurance for a flat (which isn't ideal).

Read the lease to check.


But... back to your original question:

• Your property is worth £600k, it's rebuild cost is £160k.

• So if your property is completely destroyed (e.g. by a fire, an explosion, a plane crash etc) your insurer will pay-out £160k to have it re-built.

• Once it's rebuilt, you will have a property worth £600k again, so you're no worse off.

Aretnap

+1 to all of the above, in 99% of cases is the rebuild cost which is the important figure - in the event of a total loss, like your house burning to the ground, your insurer would rebuild it and put you up in a hotel / rented home while work was ongoing. The market value would be irrelevant to the cost of doing that.

I suppose there might be some rare circumstances in which rebuilding would be impossible and you would be wanting the market value - say a nuclear accident rendering the land uninhabitable. However events of that magnitude tend to be excluded from insurance policies anyway. By implication the government is the insurer of last resort for them (unless there is no government afterwards, in which case you are on your own).

I believe that it is possible for a house to be "written off" if the market value is LOWER than the rebuild cost. This rarely arises as people don't tend to build houses unless they are going to sell for more than the cost of building then, and it certainly won't be an issue in London. However it might be something to be aware of of your ever buy a house in one of those empty streets in Hull where delapidated houses change hands for £10K.

oldernonethewiser

Cost and value are two different things.


Insurance (generally) covers cost and has no connection with value.

pawntoc5

Ok, understood. So the insurance is to reinstate me to my original position (ie. a flat on floor X). But what if other flat owners in the same building don't buy building insurance? Because there are always a few out there who don't buy such policies... In the event the whole building needs to be rebuilt, it'd be unreasonable to expect the insurer to build a whole building from ground up just to cover my flat on floor X (and maybe a few others) when they shouldn't be responsible for covering all those other units that were destroyed uninsured, right? So how does that work from the insurer's perspective, if they were faced with such a situation?

It's interesting that you guys assume it's a leasehold, and you're right - for now. But shares of the freehold in this development has just been put up for sale by the developer, and since we as leaseholders have RoFR, we've been offered the opportunity to acquire those shares. A completely different (but very interesting!) topic, but that leasehold/freehold situation may soon change.

Brodiebobs

To reiterate my earlier post freeholder arranges insurance, if they are selling the freehold there will probably be a residents association or similar set up, who will insure the building as a separate entity.

As most flats are set up this way (in the UK) the chance of the freeholder not having insurance is probably very slim, as such you finding an insurer who would knowingly insurer flat x is slim, if you arranged insurance without them knowing then the chance of them paying out would also be slim.

Speak to your solicitor and/or the current freeholder and see what the situation is and how its going to be managed going froward, I've never bought a flat myself but would have thought this would be discussed from the outset.

eddddy

pawntoc5 wrote: »

Ok, understood. So the insurance is to reinstate me to my original position (ie. a flat on floor X). But what if other flat owners in the same building don't buy building insurance? Because there are always a few out there who don't buy such policies... In the event the whole building needs to be rebuilt, it'd be unreasonable to expect the insurer to build a whole building from ground up just to cover my flat on floor X (and maybe a few others) when they shouldn't be responsible for covering all those other units that were destroyed uninsured, right? So how does that work from the insurer's perspective, if they were faced with such a situation?

Does the lease actually say that each leaseholder is responsible for insuring their own flat? That would be unusual.

But if it does, you can get indemnity insurance to cover the situation you describe.

However, it's more usual for the lease to say that the freeholder must insure the building.

pawntoc5 wrote: »

It's interesting that you guys assume it's a leasehold, and you're right - for now. But shares of the freehold in this development has just been put up for sale by the developer, and since we as leaseholders have RoFR, we've been offered the opportunity to acquire those shares. A completely different (but very interesting!) topic, but that leasehold/freehold situation may soon change.

I think you've misunderstood what 'share of freehold' means.

You will still own a leasehold flat. Your lease will remain unchanged (unless everyone agrees that they want some terms in the leases changed for some reason).

But you will also be the joint owner of the freehold of the building (probably through a company).

If the lease says that the freeholder is responsible for insuring the building, then the joint freeholders will have to arrange one insurance policy to cover the whole building.