Rebuilding cost increases could leave homeowners underinsured

The comfort of house insurance may leave owners disappointed in the event of a claim, writes Laura Slattery

Increases in the cost of rebuilding houses could leave many homeowners underinsured, the Society of Chartered Surveyors (SCS) warned yesterday on the publication of its guide to house rebuilding costs for 2002.

"Underinsuring can, sadly, in the event of a claim, lead to a large gap between what is paid out by the insurance company and the actual costs of rebuilding the home," said Mr John Daly, president of the SCS.

The SCS Guide to House Rebuilding Insurance is an annual publication that enables owners of estate-type houses built in the Dublin, Cork and Galway areas since the 1960s to calculate the value of their property for home insurance purposes.

The SCS guide sets out a table of building costs for houses from a two-bedroom terraced house up to a four-bedroom detached house, covering the total rebuilding of the house, including demolition, site clearance, professional fees and VAT.

Rebuilding costs have increased over the past 12 months, but at a lower rate than in 2001.

The biggest increases have been for three-bedroom semi-detached houses. Rebuilding costs for a three-bedroom semi rose by 6.09 per cent in Cork, where it costs €1,343 per square metre, by 3.76 per cent in Dublin, where it costs €1,689 per square metre, and by 4.67 per cent in Galway, where it costs €1,232 per square metre.

Rebuilding costs in Dublin still exceed those in Cork and Galway.

The amount homeowners need to insure is the cost of rebuilding the home in the event of a disaster such as a flood or fire, not the market value of the home.

"The price achieved for a property if sold on the open market is sometimes believed to be the value for which it should be insured. This is irrelevant as generally the property's market value bears little relationship to its reinstatement value," said Mr Daly.

If the property is not fully insured, homeowners may have to pay a proportion of reinstatement costs under what is known as an "average clause". For example, a house may be insured for €120,000 but cost €200,000 to rebuild, so it is only 60 per cent insured. In the event of damage costing €10,000 to replace, the homeowner will receive only €6,000 from the insurance company.

Mr Daly also recommended that householders ensure their policies are index-linked to avoid shortfalls in insurance payments.

Homeowners often take out home insurance policies with their mortgage but fail to renew the sum insured at a later date, insurers say, even when making significant home improvements such as building conservatories, adding a room above a garage or converting an attic.

Insurers recommend that homeowners add the cost of better-than- average kitchen fittings, built-in wardrobes and special finishes such as hardwood timber floors to the rebuilding cost calculated from the SCS chart, as well as the cost of replacing garden patios, outbuildings, basements or attics.

Home insurance premiums have escalated over the past five years due to rising construction costs and claims inflation and are expected to increase by around 25 per cent this year. According to IIF statistics, insurers recorded a loss of €41.2 million in the property insurance market in 2001. This loss was almost double that in the market in 2000.

A three-bedroom, semi-detached house in Dublin with an area of 95 square metres would require buildings insurance of €160,000, based on the SCS's estimated rebuilding cost of €1,689 per square metre. For a policy where the sum insured is €160,000 and the contents insurance covers €40,000, Hibernian Direct's online quote service offers a yearly premium of €437 for houses in Dublin 1.

The SCS Guide to House Rebuilding Insurance is available free by sending an SAE to the Society of Chartered Surveyors at 5 Wilton Place, Dublin 2.