Landlord Insurance Explained - Index Linking

Landlord Insurance Explained - Index Linking

If you have ever insured a house or arranged Landlord Insurance, chances are you will have seen the term “Index Linking” noted on your policy schedule.  

However, today's busy schedules often dictate that you don’t always make time to fully understand some of the technicalities of insurance cover and how this impacts your Buy-to-Let Insurance cover.

So what exactly does “Index Linking” mean?

At its simplest, Index Linking refers to a Property Insurance condition which increases the policy sum insured at each renewal to take into account the inflationary impact of changes to building costs, such as materials or labour charges.

For example, if a Sum Insured of £100,000 has index-linking applied at 5% (i.e. the inflationary cost of rebuilding), the revised Sum Insured would be £105,000.

Why Is This Important?

Firstly, it is the responsibility of the Insured/Policyholder to set the correct sum insured, but without any required index-linking it is easy to allow the sum Insured to remain static while other costs are increasing which could lead to underinsurance, which, in the event of a loss, could severely impact a claims settlement.

In an ideal world, you would be in a position to have a professional survey undertaken each year, but clearly, that is unlikely to be cost-effective.  

Index-Linking gives the policyholder peace of mind that their sum insured is being increased in-line with standard building inflationary levels.

Where Does Index Linking Come From?

The most common “Index” is the House Rebuilding Cost Index, which is set by BCIS (Building Cost Information Service) by RICS (Royal Institute of Chartered Surveyors) on behalf of the ABI (Association of British Insurers).

BCIS is an independent body that produces a monthly percentage, based on their professional opinion and calculation, which is then applied by Landlord Insurance providers or Home Insurers to generate the correct Index-Linked sum insured calculation.

HOWEVER – Only Effective IF Original Sum Insured Is Accurate

Having inflationary protection is all well and good, but this does entirely rely on the Landlord having the correct rebuilding sum insured at the point when their original policy was incepted.  

The most effective way to ensure your sum insured is accurate is to commission a professional surveyor to undertake a rebuilding valuation report.  

If you have recently arranged a mortgage, it is likely that the lender will already have requested a survey and the rebuilding sum insured will be included in this report.

It is also essential to undertake a regular review wide of index-linking, as some property rebuilds will involve the use of specialist materials or be subject to regional variations.  

As a minimum, we would suggest a full review every five-yearly and a Landlord Insurance policy review every three years.

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