Read an interactive and user-friendly version of this guide below.
The purpose of insurance is to reduce financial uncertainty by providing peace of mind that, in the event of any financial loss, you are covered and won’t be left out of pocket.
So long as your property is insured for its rebuild value, the cost of repairing or rebuilding your home is taken care of if something unexpected happens. But what happens if your property is not insured to its full, current rebuild value?
In 2022, Total Landlord ran a campaign to raise awareness amongst our customers on the risks of underinsurance, as we had seen a significant increase in landlords whose rental properties were underinsured, putting them at risk of serious financial loss. In this updated guide, we’ll explain why, despite the drop in properties that are underinsured, levels of underinsurance are still ‘unacceptably high’, according to recent data from valuations provider, Rebuild Cost Assessment. We’ll highlight why it is a particular problem at the moment due to the changing nature of risks, and what you can do to avoid it. But first, what is ‘underinsurance’?
Underinsurance is a term used to describe a situation where the insurance coverage is insufficient to cover the actual cost of repairing damage or making up for loss if there is an unforeseen event, such as fire or a natural disaster. If you insure your property for less than its rebuild value, you could be left in financial turmoil if there is a fire, flood or other serious loss. This is because the property would be ‘underinsured’, and if you needed to make a claim insurers would not pay out the full amount.
As a landlord, it’s your responsibility to calculate and declare the rebuild cost of your rental property and make sure that it’s insured for the correct amount, as this is the maximum amount your insurer will pay out if you need to make a claim.
“The most important thing when it comes to insuring your property, is that the premium is based on the rebuild cost, not what you paid for the property or the current market value. If you have a claim for £25,000 and the loss assessor judges that you are actually underinsured by 50%, the insurance company would only pay 50% of the claim, so you would only get £12,500 back, which would mean you’d need to deal with the shortfall out of your own pocket. On a smaller claim you may be able to get around it, but on a bigger claim, you may find yourself in a position where you would be unable to afford to get your property rebuilt.”
Steve Barnes, Head of Broking at Total Landlord Insurance
Landlords who underinsure their properties could potentially lose out on thousands of pounds worth of claims that might have been avoided. How would you cope if you needed to find £25,000 for a £50,000 claim?
The risk of underinsurance increases when the economy is under pressure. And when costs have gone up across the board, the underinsurance gap between property rebuild costs and the amount buildings are insured for in the UK widens.
According to Rebuild Cost Assessment, 76% of UK buildings remain underinsured - an improvement from 81% in 2023 and the peak of 83% in 2022. However, despite the downward trend, underinsured properties are, on average, still only covered for 63% of their true rebuild cost.
Johnny Thomson, RebuildCostASSESSMENT.com’s Marketing and Communications Director says:
“Regardless of the in-roads we’re making, I believe everyone would agree that underinsurance remains unacceptably high. The way I see it, on every high street where there’s a mix of commercial and residential properties, or on every industrial estate in Britain, between seven and eight of every ten properties you’ll see there will be underinsured. Around two will be overinsured and only one is likely to be covered for the right amount.”
Johnny continues:
“Valuations are helping a lot, but there’s also a lot more work for us and the insurance industry to do to tackle this problem. Property owners expect claims payments to meet expectations and it is far from a good outcome when this doesn’t happen. There’s an emotional as well financial cost in every case, and this is something we hope to eradicate.”
What is concerning now, say Rebuild Cost Assessment, is how underinsurance figures have been impacted by inflation since their peak in 2022. “Our latest analysis suggests that aligning sums insured on buildings with real-world rebuilding costs since the beginning of 2022 would have required an increase of 68% to 82% over the past three years. That’s not a marginal adjustment, it’s a fundamental recalibration of the risk landscape.”
Since January 2022, construction and materials costs in the UK have surged by 25% to 35%. For buildings that were already underinsured in 2022, this inflation has only widened the gap, leaving many properties even further underinsured from their true rebuild value. Without proactive updates, the risk of significant underinsurance across the industry continues to grow.
When inflation is applied to 2022 data, according to Rebuild Cost Assessment:
These are truly staggering statistics that point to a UK wide problem which can only be resolved by landlords realising the risk they’re running and making sure their buildings are insured for the right amount. The alternative is a serious risk of claim shortfalls if sums insured are not aligned with accurate rebuild costs based on today’s cost realities.
We’ve already mentioned that the underinsurance gap widens when the economy is under pressure, and in the current climate we’ve all noticed that the cost of everything – from food to fuel – has gone up. And insurance is no exception. Some of this is down to inflation, but this is not the only reason.
‘Index linking’ is a way of making sure that the value of a financial product is protected against rises in costs in the wider economy. A facility is put in place to track rises in costs – such as inflation and the cost of living – and then a similar percentage increase is applied to the value of the product.
In the case of buildings insurance, index linking typically relates to the rebuild costs of a property, which includes the labour and professional services that are required to rebuild the property, on top of inflation.
Due to a number of factors, index linking increased rapidly at the beginning of 2022, when it was around four to five per cent peaking at 18.2% by October 2022. This affected landlords because landlord insurance covers the cost of rebuilding the property if it is damaged beyond repair. Since then, index linking has decreased as house rebuilding cost inflation has calmed, but prices have not returned to the level they were at before 2022. The house rebuilding cost index was 40% higher in January 2024 than it was in January 2020.
Steve Barnes, Head of Broking at Total Landlord, says:
“Over a rolling 12 months, index linking has settled to around five per cent, which is a significant drop from the circular post-Covid increases, which peaked at nearly 20%. While this is a welcome easing, it doesn’t mean property owners can afford to be complacent. Rebuild costs remain substantially higher than pre-2022 levels, and it’s still essential to check that your property is adequately insured each year. I recommend having a professional valuation carried out at least once every five years to make sure your cover remains accurate and up to date.”
In terms of the future outlook, BCIS construction industry forecast predicts that building costs will increase by 17% over the next five years. Dr David Crosthwaite, Chief Economist at BCIS, said:
“Sentiment in construction has changed significantly since the start of the year and, with economic growth stagnating and inflation starting to pick up again, stagflation is becoming a real possibility this year.
‘As a result, we’re forecasting that 2025 will likely be another difficult year for construction with only minimal output growth evident before growth accelerates later in the forecast period.
‘While the cost of borrowing is reducing, albeit slowly, we have yet to see increased levels of investment in built assets. Furthermore, we expect to see increases in both input costs and tender prices due to the National Insurance uplift, resulting in potential affordability issues.”
While there are some signs that the situation may improve over the next five years, this is unlikely in the short term. Prices have not returned to pre-2022 levels, with the cost of many raw materials remaining high. Ongoing shortages in skilled labour are continuing to drive up labour costs, and high energy prices continue to add pressure. The situation remains uncertain for the foreseeable future.
Landlords may also be at greater risk of underinsurance due to increasing risk factors. In a recent article for Insurance Post, David Williams, chair of the Fire Protection Association (FPA) and former managing director of underwriting and technical services at AXA, expressed concerns that properties are not adequately insured, citing two examples of risks the FPA is seeing more of in recent years.
The FPA is seeing more fires that have an electrical source to their ignition which may have a lithium ion battery connection, and the London Fire Brigade has reported that the fastest growing fire risk in London is battery-powered e-bikes and e-scooters, which are causing a fire ‘every other day’. Both landlords and tenants must be aware of the risks and make sure that e-bikes and e-scooters meet the correct safety standard and are safely stored – see our landlord and tenant guide to preventing e-bike and e-scooter lithium battery fires for guidance.
While many landlords are making energy efficiency improvements to their properties for the benefit of the environment and their tenants, it’s important to understand the materials that are being used and take any necessary precautions to reduce risks.
The FPA is seeing an increase in large fires caused by solar panels, some of which are cheap, aren’t always built correctly and can be faulty.
Commenting on the push for more sustainable and eco-friendly materials being used to repair and build properties, Williams says: “It is having a massive impact. Mass timber is great in certain circumstances, but wood burns. Therefore, it’s about understanding the materials that are specifically being used and applying preparators. It might be sprinklers, it might be water mist. And those are things that we in the UK have been very lax on.”
Williams highlights the direct impact of energy efficiency improvements on underinsurance. He says:
“I have a suspicion that a lot of these new materials are being invested in to save money in the long run through better insulation, better performance, etc, but we’re not seeing it in increased sums insured. We are seeing a sometimes quite staggering increase in underinsurance at the time of a loss.”
It’s important for landlords to be aware of these increases in risk combined with macro-economic pressures to avoid being underinsured.
To underline the consequences of underinsurance, let’s look at a Total Landlord case study.
A tenant set fire to a property causing extensive fire and smoke damage throughout. At the time of the claim, the property was insured for a rebuild cost of £88,000 but it should have been insured for at least £124,000.
This meant that the property was only insured for 71% of its actual value. The fire claim amount was £35,414 but as a result of the underinsurance, the insurers applied the average and only 71% of the claim was paid out, in total an amount of £24,894.
That’s approximately £10,000 that could have gone towards rebuilding costs that the landlord will never see, which could have been the difference between that landlord being able to bring that house back up to a liveable state or having to sell it on as a write-off. It’s a situation that could potentially trap owners of the thousands of underinsured properties in the UK right now and it begs the question – with so much to lose, why are so many landlords underinsured?
Is it a deliberate route to a cheaper premium or is it simply the result of general confusion and a lack of information?
More importantly, what happens if you are underinsured and how might you get out from under it or avoid it entirely?
It’s a common misconception that landlords only underinsure properties as a means of chasing cheaper premiums, when it’s more likely to be that they have failed to include everything when calculating the rebuild cost. The ‘buildings sum insured’ is the cost of rebuilding the property if it were to be completely destroyed, and should include things like the removal of debris and any professional fees. It’s easy to overlook these costs, but they all add up.
It's also worth knowing that there are steps landlords can take to protect themselves against any increase in insurance premiums. For example, if you rarely make claims it might be worth increasing your excess as this will reduce your premium without affecting your level of cover.
Instances of underinsurance are just as likely to be the result of confusion and lack of information as they are a deliberate route to a cheaper premium. More often than not, it’s simply a case of understanding everything about the property, as well as its rebuild value and market value. Let’s start by breaking down the reasons why landlords might be underinsured.
As we’ve mentioned, buildings insurance works on the basis of rebuild value, as opposed to market value. If you insure your property for less than the rebuild value then it is underinsured. This would mean that in the event of a claim, insurers will not pay the full amount, they will apply what is known as ‘average’.
If a tenant causes damage to a property for example, the landlord would not be able to make a claim unless they had taken out specialist buy to let insurance.
With a specialist policy in place, landlords can avoid any unnecessary financial loss should the worst-case scenario actually happen.
If a landlord underestimates the time it will take to get the property back to a liveable or workable condition following an insurance claim, the loss of rent insurance may not cover a long enough period.
Carrying out improvements to your rental property such as adding an extension or making energy efficiency improvements will increase the value of the property, but will impact the insurance value too.
Similarly, a common underinsurance scenario occurs when a property owner simply renews their insurance policy year after year without making any updates that take market inflation into account.
Getting out of an old underinsured policy before taking out a more practical specialist policy is often quite simple as long as you haven’t made any claims during the policy year. You might even find that you’re still in your ‘cooling off’ period. Note, however, that if you are not still within this period you might need to pay administration fees upon leaving.
Before we go into exactly how you can avoid becoming underinsured and falling into severe financial losses in the event of an incident, let’s examine some of the terminology you might be faced with.
Buildings sum insured – The ‘buildings sum insured’ refers to the cost of rebuilding the property if it is completely destroyed, including demolition, debris removal, local authority and professional fees, which can add up to 15% to the overall costs so shouldn’t be neglected.
The average – The ‘condition of average’ in underinsurance states that the landlord bears a proportion of any loss if the property was insured for less than its full rebuild value. For example, if a landlord insures their property for £100,000, and makes a claim a few months later for £50,000 following an accidental fire.
The insurer assesses the actual rebuild cost to be £200,000, therefore only 50% of the actual value is covered. In this scenario the insurer applies ‘average’ which means only 50% of the £50,000 claim would be paid, leaving the landlord with £25,000.
Market value – This is the current value of the property on the rental market – the price at which the property has been valued on the real estate market.
Rebuild value – Not knowing the rebuild value of the property is perhaps the most common reason why properties remain underinsured, because rebuild costs are more difficult to ascertain than simple market value. But it can be done with a little help, which we’ll cover below.
Loss of rent – Loss of rent insurance covers the money you would lose if your property became uninhabitable due to an insured event that would force your tenants to move out. Loss of rent insurance enables you to claim back the lost income.
The rebuild cost is the amount of money it would take to rebuild your home completely from scratch. This needs to take into account the price of labour and materials needed to build a house identical to yours on the land you own. The sum is often (but not always) less than the market value because factors like land, location and desirability are not factored into the price.
To work out the rebuild cost yourself, first you’ll need to work out the floor area of your home, multiplying it by two if the property is two storeys. Then you’ll want to hire a surveyor, who will be able to take you through all of the costs with detailed measurements and a breakdown of every expense. Note that a surveyor should be able to offer a detailed rebuild cost even if your home is historic, listed or not built from brick.
There are tools available that help to simplify the process, such as the BCIS calculator or the Association of British Insurer’s online calculator, which also takes into account every other aspect of your property, including local and regional housing trends. However, all these can offer is rough estimates.
If you’re still uncertain, you can get a survey from a RICS member to be totally confident that your rebuilding value is correct. This is particularly important if your property is of non-standard construction or in a conservation area where it may be more expensive to rebuild due to the materials that may be required.
RebuildcostASSESSMENT.com carried out some research back in 2019 to find out how brokers’ clients were setting their buildings sum insured (BSI). The findings revealed that only one in 20 had a dedicated rebuild cost assessment completed by a regulated RICS company and over a third had used the market value. Alarmingly, 20% had simply guessed.
This is particularly important if you have extended or altered your property, or if property prices have increased significantly. A professional valuation will take every aspect of your property into account such as local and regional housing trends.
For an in-depth calculation, meanwhile, we’d recommend using RebuildCostASSESSMENT.com to provide an insightful on-site or remote property valuation.
For sum insured purposes the value needs to include not only the main structure of the building but also external areas, walls and anything else on the site. The value will also need to include costs of demolition and removal of debris, costs of rebuild and materials and professional fees for services such as architects and surveyors associated with rebuilding. Professional fees can add up to 15% to the overall costs.
It is important to take out a residential landlord insurance policy as a standard home insurance policy will not protect you in the event of negligent tenant behaviour or damage to the property. You should also check that your policy is index linked - this will increase your buildings sum insured at each renewal by a percentage based on the BCIS House Rebuilding Cost Index. Find out more in our article, why landlords need to understand how index linking affects their let.
Include everything (and we mean everything) – For sum insured purposes, the value needs to include not only the main structure of the building but also external areas, walls and anything else on the site.
If you are even remotely uncertain regarding whether or not your properties are underinsured then it’s imperative to act now before it’s too late. Don’t wait until you need to make a claim – address any potential issues today by contacting your insurer to make sure that you are not underinsured.
If you have any questions about underinsurance or would like to discuss landlord insurance with one of our experts, please contact the Total Landlord team on 0800 63 43 880 or email enquiries@totallandlordinsurance.co.uk. Or alternatively get a landlord insurance quote online today.
