Index linking is a mechanism used by insurers to ensure the rebuilding sum insured remains as accurate as possible. Index linking can also be applied to general contents and machinery and plant. The sum insured still needs to be set at an adequate level for reinstatement, otherwise you run the risk of under insurance. In this event the insurer is entitled to apply the General Average Condition and the insurer would be able to reduce any claims payment to the amount of under insurance.
Index linking is not based on the general rate of inflation. It is calculated based upon the costs of raw materials, availability of labour, demolition and waste removal, professional services fees, plus any other costs associated with a complete rebuild of the property.
We would recommend rebuilding surveys are undertaken at least every five years. Index linking will then assist with any increases to the buildings sum insured.