Speak directly to our team
01603 218000
Speak directly to our team
01603 218000
Home
16 mins read
Guides and advice Landlords Home & Property

What is index-linked buildings insurance?

When you take out building insurance, you want to be confident that your property is fully protected if the worst happens. Most home insurance policies will be index-linked, but if yours isn’t, you increase the risk of being underinsured and out of pocket if you make a claim. In this article, we look at how index-linking works, how it can help you, and what the alternatives are.  

11.11.25

By Alice Reeder

Index linked buildings insurance

What is index-linking? 

Index-linking is a mechanism used by insurers that adjusts the building sum insured on your home insurance policy in line with the BCIS House Rebuilding Cost Index. Insurers do this to ensure that your sum insured (the rebuild value of your property) remains accurate in line with inflation to protect against underinsurance.  

This is important because the cost of rebuilding a property is influenced by inflation, and if you’re policy doesn’t reflect this, you may end up being out of pocket when making a claim. 

It’s also important to note that the sum insured should be based on the rebuild value of the property, not its market value. 

If you have a blanket sum insured policy that provides cover up to a set amount (typically £500,000 or £1million), your policy won’t be index-linked; however, you still need to know the rebuild value of your property to ensure the policy provides sufficient cover.  

How does index-linking work with insurance? 

If you don’t take out a policy with a blanket sum insured, you’ll specify a full rebuild value for your property (the sum insured). When you renew your policy, the sum insured will be automatically adjusted in line with any changes in the cost of rebuilding. In other words, rather than leaving your cover at a fixed amount, your insurer reviews and updates it to make sure it reflects current rebuilding prices.  

For house insurance, the most widely used index-linking indices is the BCIS House Rebuilding Cost Index.  

For example: 

  • Sarah takes out a building insurance policy in September. The rebuild value is calculated at £450,000. 

  • She renews her policy in the following September. The average cost of rebuilding has risen by 4% over the last 12 months.  

  • The sum insured on Sarah’s policy is updated at renewal to £468,000 (£450,000 + 4%).  

It’s important to note that index-linking relies on the rebuild value provided for the sum insured being accurate in the first place – an inaccurate rebuild value can result in being either over- or under-insured, even with index-linking. This is where policies with a blanket sum insured are particularly valuable for helping you avoid underinsurance. 

Policyholders can request that index-linking be removed from their policy if it is automatically included, although this is rarely advisable. 

Rebuild value of a property 

It can cost more to completely rebuild a property than you think. To rebuild a property from scratch, you’d need to budget for the following: 

  • Surveyors’ and architects’ fees 

  • Demolition and clearance of debris 

  • Groundwork 

  • Materials and labour for the rebuild 

  • Alternative accommodation, or alternative business premises, while work is being carried out 

  • Removal of asbestos, if applicable 

In addition to the building’s structure, a rebuild would include plumbing, electrics, and fittings such as kitchens and bathrooms (or interior fit-out for commercial buildings). Restitution may also include work to outbuildings, boundary walls, pathways, gates and fences, as well as common areas around a commercial property. For this reason, it’s important to check your policy carefully so you know exactly what is – and what isn’t – included in the rebuild value.  

Is rebuild value the same as market value? 

Rebuild value is not the same as market value. It could cost more or less to rebuild a property than its value on the open market – but the two figures are unlikely to be the same. A higher rebuild value can occur in areas where the market value of the property is low, or for older or larger properties (including listed buildings), which require specialist materials and trades. On the other hand, new build properties can have a lower rebuild value than the price they would fetch on the open market.   

If your property isn’t insured for the rebuild value, you could fall foul of the ‘average clause’ when making a claim. This means that, if you are underinsured, the insurer may reduce the amount they will pay out for a claim in line with the percentage of underinsurance. Whether your claim is reduced will depend on whether you are claiming for a full rebuild of the property (the total sum insured), or for an amount less than the full sum insured (for example, for a rebuild of part of the property or a repair).  

For example.  

  • Joe takes out a non-index-linked building insurance policy for his home. The sum insured is £400,000.  

  • Some years later, Joe’s home is gutted by fire, and he needs to make a claim. 

  • Joe’s insurer discovers that he is underinsured. The current rebuild cost for his home is £600,000. 

  • If the property was destroyed and needed to be fully rebuilt, Joe would receive the sum insured he specified when taking the policy out (£400,000). Joe is £200,000 short of the full rebuild cost. 

  • If the property was deemed repairable, as Joe is underinsured by £200,000 (33%), his insurer would apply the ‘average clause’. If he was claiming £350,000 for repairs, the payout would be adjusted proportionally to reflect the underinsurance. Joe would receive £233,334 - £116,666 short of the £350,000 repair cost. 

Who is best to take out an index-linked buildings policy and why? 

Generally, the best protection against underinsurance is to take out a policy with a blanket sum insured, as this provides a high limit that, in most cases, will be sufficient. A blanket sum insured policy won’t be index-linked, and it is still the responsibility of the policyholder to ensure the sum provided is sufficient to cover the total cost of rebuilding the property. 

Index-linked buildings insurance is an alternative if your property has more than five bedrooms, was built before 1850, or has architectural features requiring specialist materials and trades, as a blanket sum insured policy may not be suitable in these cases. This includes homeowners, landlords, and people with commercial property. Index-linking can save you the hassle of reviewing and adjusting your policy (although it is recommended that you revalue your building sum insured every 3-5 years), while reducing the risk of underinsurance.  

Remember to notify your insurer of any additions to the property which might affect the sum insured, such as extensions, upgrading kitchens and bathrooms, the addition of outbuildings, paths, patios, garden walls, swimming pool, tennis courts etc. 

What are the benefits of an index-linked insurance policy? 

We’ve already explored some significant benefits of taking out an index-linked buildings insurance policy. Below is a recap, along with some additional advantages.  

  1. Protection against underinsurance. Rebuilding costs generally increase year-on-year. Index-linking adjusts the rebuild value each time you renew, reducing your risk of underinsurance. 

  1. Protection against the ‘average clause’. Because index-linked policies ensure your rebuild value takes account of current construction costs, there’s less chance you’ll fall foul of the average clause in your policy, ensuring you’re not out of pocket if you make a claim (if the sum insured was accurate when the policy was taken out).  

  1. Simplified renewal process. Your cover is automatically adjusted, meaning you don’t need to manually review and update your cover limits each year.  

  1. Reassurance for mortgage lenders. Mortgage providers normally require adequate building insurance as a condition of their loan. Index-linking can ensure your policy remains compliant by covering the true rebuild cost of your property. 

Drawbacks of an index-linked policy 

While index-linked policies offer a range of benefits, they can have a few drawbacks. These tend to occur if you take out inappropriate cover in the first place, but there are other potential downsides. These include: 

  • Increased premiums. Your premium is likely to go up each year as the rebuild cost is revised upwards. This increase can be significant at times of high inflation or construction costs. You can avoid overpaying for your insurance by making sure that the rebuild value is accurate. 

  • Your original policy must be accurate. If your property’s rebuild cost is undervalued when you first take out the policy, index-linking won’t bridge the gap to the rebuild cost in the future. When you first insure your home, ensure the rebuild cost is properly assessed. You can use the BCIS rebuild calculator to assist with this or contract a desktop or in-person survey. 

  • It won’t cover improvements unless you change the policy. This applies to all building policies. If you alter, extend, or renovate a property, you need to tell your insurer so you can increase your cover.  

Alternatives to index-linked buildings insurance 

There are alternatives to index-linked buildings insurance policies. The main options open to you are: 

  • A blanket sum insured policy. A blanket sum insured policy provides cover up to a set amount (often £500,000 or £1million) and is commonly offered by home insurance providers.  

  • Arranging your own revaluations. If you have an index-linked policy, you could arrange for a surveyor to revalue the property on a regular basis. While this can mean you insure your property for an accurate amount, hiring a professional can be costly.  

  • Do your own revaluations. You can save money by using online rebuild calculators or cost guides to help calculate the sum insured you should insure a property for, although these may not be suitable for larger or older properties. 

Other factors affecting building insurance premiums  

Before you look for a building insurance policy, it’s worth looking at other factors that can affect your premium. Some of the key ones are: 

  • Location. You’ll often pay a higher premium if the property is in an area with a higher risk of flooding, subsidence, or crime.  

  • Property type and age. Older properties, or those with unusual construction methods or materials, are more expensive to rebuild, so they attract higher premiums. If you have a property of historical or architectural interest, it’s wise to consider taking out listed buildings insurance.  

  • Security measures. If you have alarms and security systems, it could help reduce your premiums.  

  • Excess. A policy excess is the amount you agree to pay towards any claim. You can lower your premium by specifying a higher excess, but ensure you’re comfortable with paying this amount if you need to make a claim.  

  • Claims history. If you’ve made claims on your buildings insurance policy in the past, insurers may see you as higher risk and increase your premiums. For this reason, try to avoid making lots of smaller claims if you can cover the cost of these yourself.  

It’s also worth making sure that you are covered if your circumstances change. For example, if you leave a property empty for an extended period, it may invalidate your insurance. In such cases, you might need to take out unoccupied house insurance or unoccupied commercial property insurance. Similarly, if you’re upgrading your property, it may come with increased risks that are not covered by your policy. In this situation, you could opt for specialised property renovation insurance.  

Need help with your insurance?

Whether you need a quote, have a general enquiry, or want to talk it through over the phone, we're here to help.

Speak to us:  01603 218000

FAQs

Related guides and insights

17 mins
Insuring an empty house

Understanding property and insurance after the owner's death

If you’re responsible for a property after the death of a relative or close friend, you’re probably wondering how best to insure the property while you apply for the grant of probate, so we’ve created a handy guide with all the information you need.

12 mins
Are you underinsured?

Are you underinsured?

Inflation. Rising material costs. A shortage of labour. In many cases, rebuilding your home will cost a lot more than its market value. We help you check whether you’re underinsured, and what you can do to make sure your home insurance is adequate.

9 mins
Insurance premium tax

Understanding Insurance Premium Tax

What is Insurance Premium Tax and why do we have to pay it? In this guide, we look at the background of IPT and how it works.

5 mins

Why stone-built houses could leave you underinsured, and what to do about it

When arranging home or landlord insurance, understanding your property's rebuild cost is crucial. However, recent claims data has identified that, due to their higher rebuild cost, stone-built properties are at a higher risk of being underinsured.