Home insurance policies based on out-of-date rebuilding costs could leave
householders exposed to big construction bills if their property is damaged,
writes Laura Slattery

The cost of rebuilding houses increased at a higher rate this year than last, according to the Society of Chartered Surveyors (SCS).

The construction and property industry body is warning homeowners that home insurance policies based on out-of-date rebuilding costs could leave them exposed to extensive construction bills in the event of damage to property.

Rebuilding costs increased by as much as 8.78 per cent in Dublin over the past 12 months, compared with a rise of 3.76 per cent in 2001-2002.

The higher increases are due to the rise in the VAT rate from 12.5 to 13.5 per cent, wage increases of approximately 3 per cent and a hike in the cost of insurance for small contractors, according to Mr Gerry O'Sullivan, chairman of the SCS's quantity surveying division.

Another factor driving prices up is that there are a limited number of contractors who do once-off rebuilding work in the event of damage to property by flood, fire or other hazards such as landslides and lightning strikes.

"These are disasters that we think are never going to happen in Ireland," notes Mr O'Sullivan.

However, recent front page newspaper pictures have proved that they do and can destroy property.

"With costs in rebuilding homes still rising, homeowners should ensure that they have adequate cover," he says.

"Underinsuring can, sadly, in the unfortunate event of a claim, lead to a large gap between what is paid by the insurance company and the actual costs of rebuilding the home.

"Insuring it for too much, on the other hand, leads to unnecessarily high premiums."

To help homeowners get the balance right, the SCS has launched the 2003 edition of its annual guide to house rebuilding costs.

The value of cover required should be based on the full cost of rebuilding the house, not its market value - a crucial distinction and common misconception.

"Someone may have spent half a million on a property, but it may only cost €350,000 to rebuild. At the same time, someone may have spent only €250,000 on a similar property in Tallaght, and it still costs €350,000 to rebuild," explains Mr O'Sullivan.

Meanwhile, a spokeswoman for Hibernian Insurance says the company receives a lot of phone calls from customers who want to adjust the value of their policy upwards.

"But it's when they find out that someone on their road has sold their house for €500,000 and theirs is only insured for €200,000," she says.

"We say, 'no, it's not calculated on sale value, it's on the rebuilding costs'."

Underinsuring won't just lead to a shortfall in the event of total destruction of the property, it will also have a knock-on effect on minor claims.

Many home insurance policies contain what is known as the "average clause", Mr O'Sullivan points out, which could increase an underinsured homeowner's liability in the event of even partial damage to the property.

The average clause works by restricting the size of any payout to the proportion of the rebuilding costs that is actually covered.

For example, a house may be insured for €120,000 but cost €200,000 to rebuild. It is therefore only 60 per cent insured.

If a fire destroys a kitchen in the house that will cost €10,000 to replace, the homeowner will only receive 60 per cent - or €6,000 - from the insurance company.

Royal & Sun Alliance, AIB and FBD all include the average clause in their home insurance policies.

Hibernian Insurance also applies the clause in some circumstances.

Mr O'Sullivan, who is a chartered quantity surveyor with Mulcahy McDonagh & Partners, recommends that householders ensure their policies are index-linked to avoid shortfalls in insurance payments.

Mr O'Sullivan says homeowners should check if the indexes to which insurance companies were linking policies take into account inflation in tender costs - how much contractors will bid for a project, including their profit margin - not comparatively modest rates of inflation in building costs.

Tender prices are dropping in the commercial sector, but in the one-off house rebuilding market, they are on the up.

"It's a relatively closed market," Mr O'Sullivan says. "The competition is not as good as it should be."

However, he predicts there will be a levelling out in building costs in the next few years, offering some respite to homeowners.

The SCS Guide to House Rebuilding Insurance for 2003 shows those most vulnerable to underinsuring in Dublin are owners of four-bedroom detached houses. These now cost €1,735 per square metre to rebuild, up from €1,595 per square meter in last year's guide - a hike of 8.78 per cent.

The highest increases occurred in the Galway area where the reinstatement cost of a two-bedroom terraced house jumped by 10 per cent, from €1,270 to €1,397 per square metre.

The cost of rebuilding similar properties in Dublin and Cork rose by 7.69 per cent and just 1.45 per cent respectively.

The SCS guide also reveals that rebuilding costs in Galway generally have caught up with those in Cork.

In 2001-2002, the biggest overall increases occurred in Cork, with the lowest in Galway. This trend has now reversed, with the result that the rebuilding costs for two-bedroom and three-bedroom terraced houses in Galway and Cork are now on a par, with little difference between costs for two-bedroom and three-bedroom semis in both areas.

Rebuilding costs in both Cork and Galway still fall significantly short of those in Dublin.

The SCS guide covers typical estate-type houses built since the 1960s.

"If people own a house with any kind of architectural design or unique features, they would need to get an independent survey," Mr O'Sullivan says. Some detached houses in Dublin cost €2,600 per square metre to rebuild.

The figures in the table cover the total rebuilding cost, including demolition, site clearance, professional fees and VAT.

Based on the typical sizes suggested by the society, four-bedroom detached houses should be insured from approximately €205,000, €152,000 and €142,000 in Dublin, Cork and Galway respectively.

Four-bedroom detached houses insured to the next highest €10,000 will cost €433, €326 and €289 to cover in the three cities, based on quotes obtained online from Hibernian Direct.

These quotes reflect houses fitted with all the relevant alarms and include contents insurance of 30 per cent of the buildings sum insured.

Three-bedroom semi-detached houses should be insured to approximately €171,000 in Dublin, €130,000 in Cork and €126,000 in Galway. This translates to quotes amounting to €398, €265 and €251 respectively.

Mortgage lenders will offer to provide home insurance when first-time buyers are drawing down their loan.

However, homeowners are free to shop around for alternative cover.