What should the sum insured for buildings in a household policy represent?

The sum insured for buildings in a household policy should represent the rebuilding cost at the time the rebuilding is complete. This figure is crucial as it reflects the amount required to restore the property to its previous condition after a loss, ensuring that the homeowner can fully recover from damage or destruction.

Choosing the rebuilding cost rather than the market value or purchase price is important because these figures can fluctuate based on market conditions and do not necessarily account for the actual expenses involved in construction, such as labor and materials. The rebuilding cost takes into consideration current construction standards and costs, ensuring a policyholder has adequate coverage that aligns with the expenses they would incur in a worst-case scenario of total loss. A focus purely on market value or purchase price could result in underinsurance, leaving the homeowner unprotected if restoration costs exceed those figures.

Thus, establishing the sum insured based on the rebuilding cost is critical for ensuring that the insurance coverage meets the needs of the homeowner in the event of a disaster.