Why insured replacement values drift, and how to check yours

Your buildings policy carries a sum insured: the most the insurer will pay to repair or rebuild after a loss. For most buildings policies, that figure should match the cost of rebuilding, which can differ a great deal from the market value of the property. Market value includes the land and reflects demand. Rebuilding cost covers demolition, clearing the site and putting the building back to the regulations that apply when you rebuild.

Causes of drift

Owners set the sum insured once, then renew the policy each year with an index increase or with none. Over the years, several things move the rebuilding cost away from that figure.

• Construction prices. Material, labour and plant costs rise at their own rate, which can differ from general inflation.
• Changes to the building. Additions, a new roof, solar panels, a borehole, paving or a pool add to the rebuild cost, and owners forget to tell the insurer.
• Regulations. A rebuild has to meet the building regulations in force at the time, and those can cost more than the standard the building went up to.
• Allowances left out. Demolition, debris removal, professional fees, municipal approval costs and VAT sit on top of the building work.
• Escalation during the rebuild. Design, approvals and construction take months, and prices move while they run.

The cost of underinsurance

Many buildings policies include an average clause. If your sum insured falls below the replacement value, the insurer can reduce a claim in proportion. As an example, if you insure a building for two thirds of its replacement value, the insurer may pay two thirds of a claim. A partial loss, such as a storm-damaged roof, can leave you paying part of the repair yourself. Read your policy wording to see whether average applies and how your insurer calculates it.

Check your figure

• Find the basis. Check your schedule for the sum insured, the date someone last reviewed it, and whether the policy applies average.
• List what you own. Include outbuildings, boundary walls, gates, paving, pools, external services, solar and backup power.
• Measure the building. A replacement cost estimate starts from the floor area and the construction type, so work from measured areas.
• Price it at current rates. Use current building costs for your area and your specification. A generic rate per square metre misses what makes your building different.
• Add the allowances. Include demolition and site clearance, professional fees, approvals, escalation over the rebuild period and VAT, as your policy requires.
• Record the date. A replacement value holds for a valuation date. Diarise the next review.

Ask your insurer or broker what review interval they recommend and whether they accept an independent assessment. Policies differ, and the wording of yours decides how the insurer treats VAT, fees and escalation.

The replacement cost assessment

A quantity surveyor estimates the cost of rebuilding your buildings and improvements, including building services, external works, site clearance and the relevant professional and approval costs. The report states the valuation date, scope, assumptions and allowances, so you and your insurer can review the adequacy of cover from the same figures.

Trustees and body corporates carry this question for every owner in the scheme. A sum insured that falls short affects each unit, and the trustees answer for it at the AGM. A dated, documented assessment gives them a figure they can defend.

After a loss

Photograph the damage before you clear anything, make the site safe, and notify your insurer or broker. A reinstatement cost report measures the damage and prices demolition, debris removal, repairs and reconstruction, and the loss adjuster can assess the claim against that schedule. Quantum prepares replacement cost assessments and reinstatement cost reports for owners, trustees and insurers in KwaZulu-Natal.