Building Insurance Value – The Benefits of Getting It Right & Risks of Getting It Wrong

• Ask a Professional Valuer to do a Replacement Cost Valuation every 3-5 years. This could include machinery, stock and any other assets which you are responsible for insuring.
• Ask a Specialist Insurance Broker to tailor a policy around your valuation.

If you under-insure your building, the cover you get will depend on your policy terms. Three possible scenarios are below (with examples based on common building insurance policy terms.)

➤ Best-case scenario: Your insurer covers you up to the value that you insured.
Company A insures its building for $8m. A total loss occurs. The building will cost $8m to rebuild. The building has been insured for the appropriate amount and the building is fully rebuilt at the expense of the insurance company.

➤ Co-insurance scenario: Your insurer will only cover a portion of the amount you insured.
Company B insures its building for $2m. Their policy has a Co-Insurance clause. It states that the building’s Insured Value must be more than 80% of its Replacement Cost.

When Company B makes a claim, the Insurer checks the Replacement Cost. They find it to be $3m. Company B insured less than 80% of their building’s Replacement Cost. Company B is now a policy Co-Insurer under the policy’s Co-Insurance clause.

When a claim occurs, Company B must split the cost of the claim with the Insurer. How this is done will depend on the policy. Here is one way it could look:

Co-Insurance Requirement: 80%

Required Amount of Insurance: $2,400,000

Actual Amount of Insurance: $2,000,000

Claim Amount: $1,000,000

In the example above, Company B claims $1m in damage, but because of the Co-Insurance clause, they will only receive $833,000 from the Insurer, leaving them $167,000 out-of-pocket.

➤ Worst case scenario: The Insurer thinks you have under-insured on purpose and they refuse to pay your claim.
Company C insures its building for $1m. A total loss occurs. The quote for rebuilding is $1.5m.

The Insurer accuses Company A of under-insuring on purpose and misrepresenting material facts Insurer denies cover for any of the claim, leaving Company A out-of-pocket for the entire amount.

If your building has a recent professional Replacement Cost Valuation, it can make claim processing faster. There are three reasons why:

Reason 1: It is easier to lodge a claim
When you lodge a claim, insurance companies often ask you to prove the value of the assets that you are claiming for. Your valuation is an easy and reliable way to show this. It is much quicker than trying to assess value on the spot – especially if you do not have access to your building or records.

Reason 2: It is easier for the Insurer to assess your claim
If your policy’s Insurance Value calculation is unclear or unreliable, your Insurer might need to ask follow up questions or do their own building valuation. These things take time, and the Insurer will not pay your claim until the process is over.

Reason 4: You are protected in the rare event the valuation is wrong
Sometimes you can do the right thing at every step and still get the wrong result. It is very rare, but the valuation can have an error. In this situation, the Insurer will take a favourable view of your situation and may choose to waive some of the negative outcomes from under/over-insuring your building.

• Estimate building values sensibly (in the years between valuation.)
• Allow for GST.
• Have suitable sub-limits.
• Cover the likely cost of replacing your building.
• Have a suitable indemnity period that factors in rebuild times.
• On top of this, your Broker may be able to use your valuation to save you money.

Some insurance companies offer discounts to Owners who take a pro-active approach to insurance. If you have based your insurance on a professional valuation, then you could fall into this category. When you renew your policy, your Broker will be able to talk to Insurers about this on your behalf.