When insuring a property, it is crucial to understand the difference between Declared Value and Sums Insured. These terms are often confused, but they play distinct roles in ensuring you have adequate coverage for your property.

Declared Value

The Declared Value represents the cost of rebuilding or replacing a building on the first day of the insurance policy. This figure is determined through a Reinstatement Cost Assessment (RCA), carried out by RICS Chartered Surveyors. This assessment ensures that the valuation is accurate and reflective of the actual costs required to reinstate the building should a total loss occur.

It is recommended that a Reinstatement Cost Assessment be completed every 3–5 years or after any significant structural changes to the property. If you are uncertain whether your declared value is correct, the best course of action is to obtain a professional RCA.

To keep up with rising construction costs, index linking is applied to the declared value each year. This ensures the rebuild costs stay aligned with inflation. The Building Cost Information Service (BCIS) provides the necessary figures for these adjustments.

Sums Insured

The Sums Insured is derived from the Declared Value and represents the maximum amount an insurer will pay out in the event of a claim. This figure provides a form of inflation protection, safeguarding policyholders from unexpected increases in rebuild costs during the insurance period.

Insurers apply an uplift to the Declared Value to account for inflation and unforeseen expenses. This uplift typically ranges from 0% to 50%, depending on the insurer and policy terms. For example, if a policy renews on 1st January, but a claim is made in December of the same year, the rebuild costs may have increased due to inflation. The uplift ensures that policyholders are not penalised for these fluctuations, provided the initial valuation was accurate.

The Sums Insured can also cover additional aspects beyond rebuild costs, including:

– Alternative Accommodation – covering temporary housing costs if the insured property becomes uninhabitable.

– Loss of Rent – compensating landlords for rental income lost due to damage.

– Contents Insurance – protecting valuable possessions within the property.

Risk of Underinsurance

Underinsurance occurs when the Declared Value or Sums Insured on your policy is lower than the actual cost to rebuild or repair the property. This can leave policyholders significantly out of pocket in the event of a claim.

For example, if a recent rebuild valuation confirms that your property would cost £400,000 to reinstate, but your policy only covers £300,000, you are underinsured by 25%.

Most buildings insurance policies include an ‘average clause’, which allows insurers to reduce the claim payout in proportion to the level of underinsurance.

Example of an Average Clause in Action:

– Rebuild Cost: £400,000

– Insured Amount: £300,000 (i.e. 75% of the full value)

– Claim: £100,000

– Insurer’s Payout: £75,000

This means you would have to cover the £25,000 shortfall yourself, despite having insurance in place. The logic is that you’re only covered for 75% of the actual value, so the insurer only pays 75% of the claim.

In more serious cases, if an insurer believes the underinsurance was deliberate—for example, to reduce the premium cost—they may:

– Deny the claim

– Void the policy entirely

– Refuse to offer future cover

Why Accuracy Matters

Having an incorrect Declared Value can lead to underinsurance or overinsurance. If the declared value is too low, you may not receive sufficient funds to rebuild in the event of a loss. Conversely, an excessive declared value could mean you are paying unnecessarily high premiums. Ensuring your property is accurately valued and regularly reassessed is key to maintaining adequate insurance coverage.

By understanding the distinction between Declared Value and Sums Insured, property owners can make informed decisions and avoid financial shortfalls in the event of a claim.

Speak to Our Experts

Don’t leave your property exposed to risk. As a trusted insurance broker, we’re here to help you ensure your Declared Value and Sums Insured are accurate and up to date.

Whether you need a full policy review or support arranging a Reinstatement Cost Assessment, get in touch with our team today for clear advice and tailored protection.