Underinsurance.
You're underinsured when your sum insured is less than it would cost to rebuild, or replace, what you've insured. If that happens, many policies pay only part of any claim, even a small one.
Last reviewed October 2026
What underinsurance means
Your buildings sum insured should be what it would cost to rebuild your guest house from the ground up. That's the rebuild cost, and it isn't the same as the market value.
The market value is what the property would sell for. It includes the land, which you would still own after a fire, so it never needs rebuilding. It also depends on the location and, for a guest house, the trade. The rebuild cost is what it would take to clear the site and put the same building back.
Either figure can be the higher one. A plot in a sought-after seaside town can be worth a lot. A big Victorian villa with stone walls and tall ceilings can cost far more to rebuild than it would sell for.
What the rebuild cost should include
- Demolition and clearing the site
- Architects', surveyors' and other professional fees
- Rebuilding like for like, in the same or similar materials
- Meeting today's building regulations
- VAT, where it applies
- Outbuildings, walls, gates, fences, drives and paths
Listed and thatched buildings usually cost more to rebuild. The work may have to match the original, and it often needs specialist trades.
A worked example
Many policies include a condition called “average”. If you're underinsured, it lets the insurer cut a claim in proportion to the shortfall. The numbers below are made up and rounded to keep the sums easy.
What it would cost to rebuild
£1,000,000
The full rebuild cost of the guest house.
What it was insured for
£750,000
Only 75% of the rebuild cost.
So the insurer may pay
£75,000
75% of the £100,000 repair bill, less the excess.
How the £100,000 repair bill is split
- The insurer may pay £75,000, which is 75% of the bill, less the excess.
- The owner pays £25,000 themselves, the other 25%, plus the excess.
That's what catches owners out. The repair bill is far below the £750,000 sum insured, but the claim is still cut by a quarter.
If the guest house were destroyed, the most the policy would usually pay is the £750,000 it was insured for. That would leave the owner £250,000 short of the cost of rebuilding.
Does average apply to every policy?
No. Policy terms vary. Some policies apply average in different ways, some provide a margin before it applies, and others may not include an average condition. Check your policy wording to understand how your cover works. If you're unsure whether your guest house is insured for the right amount, speak to us. We'll help you understand your policy and the options available.
Why guest houses are often underinsured
It usually isn't deliberate. A figure that was right once goes out of date, or it came from the wrong place to start with.
Building costs have gone up
Materials and labour usually cost more each year. A figure that was right when you last checked may be too low now.
Building work was never added
An extension, a loft conversion, new en-suites or a converted outbuilding all add to the rebuild cost. If nobody updated the sum insured at the time, the cover hasn't kept up.
The purchase price or market value was used
It's easy to put down what you paid, or what an estate agent said the place is worth. Neither one is the rebuild cost.
Listed, thatched or period features
Thatch, natural slate, stone walls, sash windows and ornate plasterwork need specialist trades, and they usually cost more to put back.
Outbuildings and walls were missed
Garages, sheds, an annexe, boundary walls, gates, fences, drives and paths all count towards the figure. They're easy to forget, and they add up.
How to get your rebuild cost right
Your buildings sum insured should reflect what it would cost to rebuild your property from scratch — not its market value or what you paid for it. Getting this figure wrong could leave you underinsured, so it's worth taking the time to check it.
There are 3 main ways to estimate your rebuild cost, depending on your property and the level of reassurance you want.
- Option 1
Use the free BCIS rebuild calculator
Best for: an initial estimate for a straightforward property.
The free online calculator from BCIS (the Building Cost Information Service) gives a basic indication of your property's rebuild cost using the details you provide. It's a useful starting point, but it isn't a professional assessment and may not reflect all the features or costs involved in rebuilding your particular property.
For listed, thatched, historic or unusual buildings, or properties with complex features, you should consider a more tailored assessment.
- Option 2
Arrange an online rebuild cost assessment through us — £152
Best for: a more tailored assessment without the cost of a site visit.
We can arrange an online rebuild cost assessment through RebuildCostAssessment.com at our discounted price of £152. You'll provide information about your property, which is used to prepare a more detailed estimate of its rebuild cost. Most assessments are completed remotely, although a site visit may be recommended where necessary.
It's a useful middle ground between a basic calculator and commissioning a surveyor to visit your property.
- Option 3
Commission an on-site assessment by a chartered surveyor
Best for: high value, listed, historic or unusual complex properties, or total peace of mind.
A chartered surveyor visits your property, inspects and measures the building, and assesses the likely cost of rebuilding it. This allows the surveyor to consider its construction, features and any specialist materials or methods that may be required. This is generally the most comprehensive option and can be particularly valuable for properties where a standard calculation may not be reliable.
Fees typically start at several hundred pounds and increase depending on the property's size, complexity and location. Look for a suitably experienced chartered building surveyor regulated by RICS (the Royal Institution of Chartered Surveyors). We can obtain a figure from our recommended provider.
Keeping your rebuild figure up to date
Whichever method you choose, check your buildings sum insured at every renewal and after significant building work or alterations. Index-linking can help, but it isn't a substitute for getting the original figure right. It adjusts your sum insured in line with an index of building costs, where applicable, but it may not correct an inaccurate starting figure or account for changes to your property. It's recommended to get a written review every 3 years.
If you have a mortgage, don't assume the figure required by your lender is necessarily enough to cover the full cost of rebuilding.
Not sure which option is right for your property? Speak to us on 01288 353999. We're happy to talk through the options and help you decide what may be appropriate.
It's not just the building
Your contents and your loss-of-income cover can be underinsured too, and some policies apply average to them in the same way.
Contents and stock
Contents are usually insured for what it would cost to replace them as new. Walk round with a notepad: beds, mattresses, linen, furniture, carpets, curtains, kitchen equipment, TVs and everything in your own rooms. It soon adds up.
Stock means the breakfast food and drink, the toiletries, and anything you sell. If you stock up for busy times, ask whether your policy allows for a seasonal increase.
Loss of income
Business interruption cover is usually based on your gross profit, for an “indemnity period” you choose. That period should be long enough to rebuild and get back to normal trade, including winning back your bookings. Planning, design and building work all take time. Larger guest houses often choose 24 months or more.
If the gross profit figure is too low, a claim may be cut in the same way as for the building.
Questions owners ask
What is the average clause?
It's a condition in many policies that can cut a claim if you're underinsured, in proportion to how far short your sum insured is.
Insure for 75% of the full value and the insurer may pay only 75% of each claim, even a small one. Some policies allow a margin, such as 15%, before average applies, and some don't include it at all. Check your policy wording, or ask us to check it with you.
Last reviewed October 2026
Is the rebuild cost the same as the market value?
No. The rebuild cost is what it would take to clear the site and build it again. The market value is what it would sell for, land included.
Either one can be higher. Land in a popular town can be worth a lot, while an old stone building can cost far more to rebuild than it would sell for. Buildings insurance should be based on the rebuild cost.
Last reviewed October 2026
How often should I check my rebuild cost?
Check it every year at renewal and after any building work. A professional assessment every few years helps keep the figure accurate.
Building costs change, and so does your guest house. An extension, new en-suites or a converted outbuilding all add to the figure. Tell us about any changes so your cover can be updated.
Last reviewed October 2026
Does index-linking stop underinsurance?
Not on its own. Index-linking adjusts your sum insured in line with building costs, but it can't fix a figure that was wrong to start with.
If the starting figure is 20% too low, index-linking keeps it about 20% too low. It won't pick up an extension or other building work either. Get the starting figure right, then let index-linking help it keep pace.
Last reviewed October 2026
What happens if I'm underinsured and claim?
If your policy has an average condition, the insurer may pay only part of your claim, cut in proportion to how far short your sum insured is.
The most a policy usually pays is the sum insured, so a big loss could leave you well short of the cost of rebuilding. It's far easier to put the figures right at renewal than after a claim.
Claim not paid in full? 10 common reasons
Last reviewed October 2026
Not sure your figures are right?
We offer free, no-obligation reviews of your cover. Ring 01288 353999 with your schedule to hand, or ask for a quote and we'll ring you. We'll go through your sums insured with you and point you to help with the rebuild figure.