Why are commercial insurance valuations obtained?
Property owners normally insure their property against damage from earthquake, fire and other disasters because it is prudent risk management. Where a property is held in trust, commonly the Trustees/ Trust Deed require the property to have adequate replacement insurance in the event of a total loss.
What does the valuation cover?
A property insurance value differs substantially from a market value in that the values being calculated are mainly concerned with the replacement of the asset in the event of a disaster, and does not concern itself with the land value. Please note that stained glass windows are usually not included in the building valuation. Cover required for stained glass windows not included in building valuations can be requested with a supporting valuation.
How long does a commercial insurance valuation last?
Construction costs can fluctuate significantly. In the past, we have seen demand after the Christchurch earthquakes, housing shortages, supply prices and wage rates increase costs significantly over short periods. The Insurance Council recommends as follows: Our general advice would be to obtain updated property valuations at least every two years but make sure that it’s supported with adequate inflation provisions for a 24-month period. If that cannot be done then get an updated valuation every year. The maximum time between valuation updates is 3 years.
Who pays for the commercial insurance valuation?
The valuation cost is met by the owner of the building.
What is provided?
When doing an insurance valuation you will get a certificate stating the assessed Reinstatement Value, Reinstatement Value Inflationary Provision and Demolition Estimate. It is the total of these three figures which is commonly used to insure the properties. You can also ask for an Indemnification Depreciated Replacement Cost Value and Indemnification Cost Value Inflationary Provision. If you are considering Functional Replacement (FRV), this value can also be provided along with an Inflationary Provision.
Note: it is usual to discuss FRV with insurers prior to requesting an FRV estimate as part of your valuation. Insurers Commentary.
Insurance Implications
- Insurers require valuations for replacement cover to be updated every 2-3 years, this ensures the values remain inflation proofed, and also recognises changes such as additions and new buildings.
- Insurance cover is limited to the sum insured of each individual building/structure described on your insurance schedule. If the valuation is out of date, you will be under-insured.
- If Replacement valuations are not updated, then insurers will revert the policy to indemnity cover only. This means that claims settlements will take into account such things as depreciation, age, market value and wear and tear.
Terminology
Below is a brief explanation of the relevant insurance terminology.
Reinstatement Estimate is the estimated cost to rebuild the asset. The rebuild cost includes all costs necessary to meet current Building Act requirements, and covers council and professional fees, and takes into account using current equivalent technology, material and services.
Reinstatement Inflationary Provision is a provision for inflation in the reinstatement cost during the insurance period, claim period, design and consenting period and rebuild period.
Indemnification Depreciated Replacement Cost is the depreciated value of the asset, taking into account the age and condition of the building, and its anticipated life expectancy.
Indemnification Inflationary Provision is a provision for inflation in the reinstatement cost during the insurance period.
Demolition Cost is the cost to clear the site in the event of a loss.
Sum Insured is the sum of the Reinstatement Estimate, Reinstatement Inflationary Provision and Demolition Cost.
Functional Replacement Cost Estimate is the estimated cost required to reinstate all assets to perform similar tasks. Commonly a known design with a build cost of between 60% and 80% of the Reinstatement Estimate.
Functional Replacement Cost Inflationary Provision is a provision for inflation in the Functional Replacement Cost during the insurance period, claim period, design and consenting period and rebuild period.