This case study is based on a real instruction. Names, addresses and identifying details have been changed, and figures rounded, to protect client confidentiality.
How the instruction arose
A residents’ management company owning the freehold of an eight-flat converted Victorian block in south west London asked us to review their buildings insurance. Their broker had queried the declared sum insured at renewal, and nobody on the board could establish where the figure had come from.
The declared sum insured was £1,450,000. It appeared to have originated from a valuation carried out at some point in the 2000s and index-linked annually since, with no reassessment.
What we found
Our assessed reinstatement cost was £2,650,000 — a shortfall of £1.2 million, meaning the block was insured at roughly 55% of its true reinstatement cost.
Index-linking is not a substitute for reassessment. It applies a general construction cost index to a figure that may have been wrong in the first place, and it takes no account of changes to the building, to legislation, or to the specific costs of the construction it happens to be. In this case the original figure had been low, and eighteen years of indexation had preserved the error rather than corrected it.
What the average clause would have done
This is the part that concentrates minds. Most commercial and block insurance policies contain a condition of average: if the sum insured is less than the true reinstatement cost, the insurer reduces any claim in the same proportion — including partial claims, not just total losses.
We modelled it against a realistic scenario: an escape of water from a top-floor flat causing £180,000 of damage across three flats and the common parts.
| Figure | |
|---|---|
| Assessed reinstatement cost | £2,650,000 |
| Declared sum insured | £1,450,000 |
| Proportion insured | 54.7% |
| Cost of damage | £180,000 |
| Likely settlement after average | £98,500 |
| Shortfall borne by leaseholders | £81,500 |
That £81,500 would have fallen to be met through the service charge, across eight flats, with no realistic recourse. The board had assumed underinsurance only mattered if the building burned down. It does not.
What a reinstatement cost assessment actually includes
An RCA is not a market valuation and has nothing to do with what the flats would sell for. It is an assessment of the cost of rebuilding the property to its existing form, size and standard, and it comprises:
- Rebuilding cost of the structure and finishes, based on measured floor areas and construction type, using BCIS rebuild cost data adjusted for location, height, access and specification;
- Demolition and site clearance, including the cost of shoring and protecting adjoining properties — significant here, as the block was mid-terrace with party walls to both sides;
- Professional fees — architect, engineer, principal designer, building control and quantity surveying, typically 12–15% of works cost;
- Compliance with current regulations, since a rebuilt structure must meet today’s Building Regulations, not those in force in 1890;
- Site constraints — restricted access, no on-site storage, and controlled parking, all of which raise contractor pricing in inner London;
- VAT, where recoverable elements and irrecoverable elements are treated correctly;
- Inflation allowances covering the period to the anticipated date of loss and throughout the rebuild programme.
The last item is routinely missed. A rebuild does not start the day after the fire. Between loss adjustment, design, planning and procurement, twelve to eighteen months can pass before work begins, and the programme itself may run two years. The sum insured has to carry the building through all of it.
The outcome
The sum insured was increased to the assessed figure at renewal. The additional premium was approximately £1,900 per annum across the block — around £240 per flat per year — against an exposure of over a million pounds.
We also recommended reassessment every three years with indexation in the intervening years, which is the approach RICS guidance supports, and which the board has adopted as a standing item.
Frequently asked questions
What is a reinstatement cost assessment?
A reinstatement cost assessment is a professional estimate of what it would cost to rebuild a property from scratch following total loss, including demolition, site clearance, professional fees, regulatory compliance and inflation. It is used to set the buildings insurance sum insured and is entirely separate from market value.
What happens if my building is underinsured?
If the policy contains a condition of average — most do — the insurer can reduce any claim in proportion to the underinsurance. A building insured at 55% of its true reinstatement cost may recover only around 55% of even a small claim, with the balance falling on the owners or leaseholders.
How often should a reinstatement cost assessment be reviewed?
Common practice, supported by RICS guidance, is a full reassessment every three years with index-linking applied in between. A reassessment should also be triggered by any material alteration, extension or change of use.
Is a reinstatement cost assessment the same as a valuation?
No. A market valuation tells you what a property would sell for, which reflects land value, location and demand. A reinstatement cost assessment tells you what it would cost to rebuild it. In central London the market value is usually far higher; in some rural or specialist buildings, the rebuild cost is higher.
When was your block last properly assessed?
Blakes Chartered Surveyors carry out reinstatement cost assessments for residents’ management companies, freeholders, managing agents and individual owners across London and the South East. Most are delivered within 5–10 days of inspection, on a fixed fee agreed in advance.
Call 020 7373 7373 or email info@blakessurveyors.com.
