Large dams are emerging drivers of landscape-scale habitat fragmentation, causing extensive flooding and transforming hilltops into islands. Environmental Impact Assessments (EIAs; the process to assess and account for impacts of development) do not explicitly consider reservoir islands in calculations of habitat impacted by dam construction. Reservoir islands maintain relict biological communities from the previously continuous habitat. Relict communities are subject to an extinction debt whereby species are lost over time. We demonstrate how estimating the ‘conservation value’ of islands (CV; the proportion of relict continuous habitat [forest] species on islands) using relict species–area relationships (RSARs), can be used in an area-of-impact correction tool to account for insular habitats in EIAs. We used data from eight taxonomic groups within the Balbina Hydroelectric Reservoir (BHR) archipelago in Brazilian Amazonia. We found ca. 72,000 ha of insular habitat had reduced CV, equating to 60% of aggregate island area, and that an additional 24% of the ca. 300,000 ha BHR water surface area should be included in area assessments for impacted terrestrial habitat. Where reservoir island creation is unavoidable, using RSARs to assess the CV of islands enables more accurate and dynamic assessment of the ecological impacts of dam construction.