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14/7/25 8:13 pm
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Cost of premium is always front of mind when landlords take out insurance, but under-insuring can be a very costly mistake.
A recent survey has revealed that nearly 70 per cent of UK brokers are concerned that their clients are under-insured. According to the latest insurer’s Broker Barometer survey, seven out of 10 brokers have seen an increase in insurance claims that are either denied or paid out at a lower amount than the true loss, caused by under-insurance.
Cost of the premium and limiting cover options were cited as the main reasons for being under-insured, which meant that on average there was a shortfall of 73 per cent of the loss value, or up to £400,000. Only around one-third of the surveyed brokers’ clients were said to regularly check the value of their assets on renewal.
Everyone expects they’ll never need to make a claim, especially a large one, but the unthinkable sometimes does happen and that’s what insurance is for. A serious fire, a pipe burst and flooding or a major structural event may happen at any time.
That’s when you find out the quality of your insurance cover. How wisely did you choose your insurance company, and how accurately did you do your sums to determine replacement value? The sum insured is vital to avoid a calamity turning into a financial disaster.
Insurance is there to protect your investment, not just to comply with your mortgage stipulations. Yet many landlords, through lack of attention or understanding, find themselves under-insured, and on occasion, even over-insured. Understanding fully how replacement costs and policy conditions work is a vital part of property ownership.
This article looks at the core principles of property insurance, what under- and over-insurance mean in practice, and how to get your rebuild cost right so you’re properly protected.
The article applies primarily to England & Wales and is not a full interpretation of the law. Always seek professional advice before making or not making decisions. Use this guide as the starting point for your research, not an endpoint.
At its heart, insurance is based on the principle of indemnity — the idea that, following a loss, you should be restored to the same financial position you were in before the event, no better and no worse. Insurers have safeguards in place to prevent claimants from making a profit, insurance isn’t designed for that, it’s simply there to put things right.
There are several other basic principles of insurance you should be aware of:
Insurance contracts between the insurer and the insured are contracts of utmost good faith or in Latin, (uberrimae fidei). This means that both parties must be honest and completely open about ALL known material facts.
Failing to disclose something significant to the insurer means it cannot calculate the true risk. Therefore, if you have failed to disclose or update the insurer when things change, such as having had previous claims, prolonged unoccupied periods, or commencing major building works and renovations, then you can invalidate your cover.
You must have an insurable interest in the property insured, so you can only insure something which in the event of a loss you would suffer yourself.
What caused the event that triggers the insurable loss? Proximate cause (causa proxima) in Latin, is the dominant, efficient, or primary (insured) event that sets in motion a chain of circumstances leading to a loss.
An insurer is only liable for losses that are “proximately” caused by a covered peril under the policy. It is not always the last event in a chain of events or in time that matters, but the one most effective in producing the damage or injury.
For example, a flood (excluded peril) leads to an electrical short, and a fire destroys the building (covered peril), but the claim is denied in this instance as the proximate cause was the uncovered peril, the flood.
Understanding these principles is important because they underpin how claims are handled and why disputes sometimes arise. But where most landlords get caught out is not in the small print, it’s in the numbers.
Underinsurance is one of the most common — and most costly — problems in property insurance. It occurs when a property is insured for less than its full reinstatement or rebuild cost.
For example, let’s say your rental property would cost £400,000 to rebuild from the ground up, including demolition, materials, labour, professional fees and compliance with current building regulations. But your policy only covers £300,000. On paper, you’re only around 25 per cent short — but in practice, that gap can be financially devastating.
This leads us to another important principle of all insurance contracts, the average clause. It means that if you’re underinsured, your claim payout is reduced in proportion to the shortfall. So, if you’ve insured your property for only 75% of its true value, you’ll only receive 75% of any claim amount, even if it’s for a smaller partial loss.
Contribution is another important principle of insurance. Contribution is an insurance principle that ensures that insurers will share the cost of a claim when a policyholder has more than one policy covering the same loss - overlapping coverage from multiple policies for the same risk. This preserves the non-profit from a claim principle.
Look at the inflation statistics. Over a 20-year period, the cost of building materials has probably increased many times over. Doing nothing means that under-insurance creeps in over time without you noticing. Common causes include these rising construction and material costs, particularly in recent years inflation in the building trade has been dramatic, as have professional fees.
If you fail to re-assess your policies for rebuild cost - these are not the same as market value – every time your policy renews, you run the risk of being under-insured.
If you own houses for example which are of standard construction, you may be able to rely on the replacement values provided by The Building Cost Information Service (BCIS) online calculator.
This produces a range of detailed guidance on the cost of rebuilding houses and some flats. The Association of British Insurers (ABI) has commissioned BCIS to provide general guidance to help you check the adequacy of your sum insured.
Be careful, you need to consider alterations and extensions, and whether the building is listed or in a conservation area, all of which can substantially affect the re-build cost.
The ABI site provides general guidance on the rebuilding cost of houses (of standard construction) and some types of flats. However, if you want the correct rebuilding cost for commercial premises which are not standard builds in the main, you will need the services of a chartered building surveyor to produce a report and valuation.
Once you have established the true re-build cost in this way, you can track the costs increases in subsequent years using the construction price and costs indices provided by the government – you don’t need to have a survey every year.
While less common, over-insurance is wasted money. This is when you insure your property for more than its true reinstatement value. Landlords sometimes assume it’s safer to overestimate, perhaps using the market value as a guide. But market value can be far less or far more than the re-build costs.
Market value includes the value of land and location, elements that don’t need replacing etc. Insurance covers only the cost of rebuilding the structure and restoring the property to its previous condition.
Insuring for more doesn’t work in your favour. Insurers will never pay out more than the actual rebuild cost, no matter how high your sum insured. So, overinsurance simply means higher premiums for no additional benefit. Aim for precision, don’t just guess.
Getting the rebuild cost right is important, but this is where many property owners and landlords go wrong. Rebuild cost is not the same as what the property would sell for on the open market. It’s what it would cost to completely rebuild it from scratch.
This figure includes:
Have a professional valuation - the gold standard is a RICS (Royal Institution of Chartered Surveyors) Reinstatement Cost Assessment. This gives an accurate, legally defensible rebuild value.
The BCIS assessments using The Building Cost Information Service (part of RICS) online calculator provides detailed rebuild cost estimates but only for standard constructions – mainly for domestic properties. There are some online tools available, but these are only for rough checks, rarely adequate for complex, listed, or multi-unit properties.
You should reassess your rebuild cost on an annual basis using the indices available or those provided by your insurers. Many insurers will automatically adjust your sum insured in line with inflation, but you need an accurate starting valuation.
Landlords face some additional insurance complexities beyond the average homeowner. You need a good specialist broker who knows the rental market inside out, such as Total Landlord Insurance.
Loss of rent and alternative accommodation are items you should consider for your policy with an indemnity period of typically 12, 24 or even 36 months, time to allow for long rebuilding.
If you own a listed building, you may require specialist cover due to the expensive heritage restrictions, bespoke materials, and higher labour costs involved in reinstatement.
HMOs, high rise and special conversions with high safety standards, compartmentation, and fire escape routes all affect risk and therefore policies must reflect the true nature of the types of occupation.
If you have a property standing empty for more than 30 days, many standard policies will limit or even suspend cover unless the insurer is notified. You MUST communicate ALL changes to your insurer - always inform them of any material changes, for example major alterations, changes in tenant type, or new uses for the property.
Good insurance management isn’t about cutting costs; it’s about precise costing and ensuring you’re properly covered for all anticipated risks.
Many landlords cut corners or are simply careless when it comes to insurance. It feels like a necessary evil — an expense they hope never to use. But insurance is an important part of property ownership, an investment in stability. It allows you to absorb the unexpected without derailing your financial life.
Under-insurance will leave you thousands of pounds out of pocket if the worst happens. Over-insurance on the other hand wastes your money. The answer lies in accurate, up to date rebuild assessments and periodic reviews.
[Main image credit: Kampus Productions]
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