FCA Consumer Duty and reinstatement values

FCA Consumer Duty and reinstatement values: what insurers now expect from your evidence

Insurers and brokers are facing closer scrutiny over how the sums insured for commercial buildings are worked out. The FCA Consumer Duty has placed a clear obligation on firms to show that a reinstatement cost assessment grounds the figures, rather than a rounded estimate or an old valuation carried forward. 

For property owners, that shift matters just as much, because an outdated reinstatement value is often what determines how much of a claim actually gets paid.

What does the FCA Consumer Duty mean for reinstatement values?

Introduced in 2023, the Consumer Duty rests on Principle 12, which requires firms to act to deliver good outcomes for customers. Insurers and intermediaries must be able to show that cover represents fair value and that customers are not left carrying a foreseeable risk of harm. 

For commercial buildings insurance, that duty extends beyond typical retail consumers and covers many business customers holding ICOBS regulated policies too.

In practice, this asks insurers and brokers to evidence how a sum insured was reached, rather than simply accept the figure a client or a previous policy provided. Where that figure rests on market value, an old estimate, or a simple index uplift, it no longer meets the standard the regulator expects.

Why has underinsurance become a bigger risk for commercial property?

Construction costs have risen steadily since 2020. As well as this, many commercial buildings still carry sums insured based on market value or purchase price rather than the true cost of rebuilding. Recent industry research suggests that only a small minority of UK commercial properties are insured accurately, with the majority left underinsured to some degree.

Regulatory change adds a further layer of risk. The Building Safety Act, together with tightening fire safety and energy efficiency standards, can materially raise the cost of rebuilding a property to meet current requirements. A sum insured that has not been reviewed against these changes is likely to fall short at exactly the moment it is tested by a claim.

What happens if a property turns out to be underinsured?

Most commercial property policies include an average clause, or a co-insurance clause under Industrial Special Risks wordings. If the declared sum insured is lower than the true reinstatement value, the insurer can reduce any claim payment in proportion to the shortfall. A building insured for half its rebuild cost, for example, may only receive half of any claim, whatever the size of the loss.

This is not a penalty applied selectively. It is a standard policy term, and it applies whether the underinsurance was deliberate, careless, or simply the result of a valuation that was never updated.

What evidence are insurers now expecting from policyholders?

Underwriters are increasingly asking for more than a round number or a historic figure adjusted by an index. A rebuild cost assessment carried out by a suitably qualified surveyor gives a documented, defensible basis for the sum insured, one that can be produced at renewal or relied on at claim stage.

Insurers want to see that the figure reflects the specific building: its construction, its use, its fixtures, and any works needed to bring it up to current regulations. Brokers, in turn, need that same evidence to demonstrate they have met their own obligations under the Duty when recommending or renewing cover.

What does a reinstatement cost assessment involve?

A reinstatement cost assessment is carried out by a chartered surveyor who inspects the building and calculates the full cost of rebuilding it. This covers materials, labour, professional fees, demolition, and site clearance.

The assessment accounts for the building's specific features, from structural elements to specialist plant, and factors in the regulatory requirements that would apply to a full rebuild. The result is a reinstatement value grounded in the building itself, rather than an estimate carried forward from a previous policy or drawn from a general market figure.

How often should reinstatement values be reviewed?

RICS guidance recommends a full rebuild cost assessment every three to five years, with index linking used to adjust the figure between reviews. Index linking has its limits, though. It maintains the position a policy already holds; it does not correct a sum insured that was too low to begin with.

A building that has been extended, altered, or affected by new regulation since its last assessment is likely to need a fresh review sooner than the standard cycle would suggest. Waiting until renewal, or worse, until a claim is underway, leaves little room to correct a shortfall.

What should property owners do now?

Landlords, owner-occupiers, and brokers can all take practical steps to close the evidence gap the Consumer Duty has created:

• Commission a reinstatement cost assessment from a chartered surveyor rather than relying on a market valuation or a rough estimate.
• Review sums insured at every renewal, not just when a claim highlights a shortfall.
• Keep clear records of how a sum insured was calculated, so it can be evidenced if it is ever challenged.
• Flag any extension, alteration, or change of use to your insurer and surveyor as soon as it happens.
• Speak to a broker or surveyor before assuming that index linking alone has kept cover accurate.

Speak to BTG Eddisons about reinstatement cost assessments

Our insurance valuations team carries out reinstatement cost assessments for landlords, occupiers, and brokers across the UK, giving you a documented reinstatement value that stands up to scrutiny from insurers and regulators alike.

We understand that every building is different, so we build every assessment around your specific property rather than a generic template.
If you need an up to date, defensible reinstatement value for your commercial property, call 0330 191 8107, email [email protected], or complete the contact form below to arrange a consultation.