Understanding Property Insurance
Insured property values are something you should carefully consider and review regularly, but why?
Say the values insured for the building and contents of your community hall have remained unaltered for ten years. That means someone on your committee may have set a replacement value for the building and the contents, and it has not shifted within that time. If there is damage to the building or the worst occurs, and it is destroyed, there may be problems in repairing/rebuilding the structure if the property is insured for the wrong amount. The value of property can fluctuate greatly over time.
Underinsurance is when the Sum Insured under your policy is not enough to cover the value of the items you are insuring. To minimise your risk of being underinsured, it’s important to take some sensible steps and make some informed decisions when reviewing your insurance arrangements.
The Concepts to Consider:
- Under Insurance
- Sums Insured
- How Under Insurance Conditions Could Affect The Amount Paid In A Claim
- Contents Insurance
- Ensuring The Correct Valuations
Buildings and other assets, including contents, should be insured for full replacement value. This is the cost to rebuild or repair your building in similar materials used when it was new or to replace or repair other lost assets with modern equivalents.
You should also include an allowance for the removal of debris and the cost of expert services such as architects’ or engineers’, fees, which may be needed to reinstate the loss. If you are under-insured your claim will be reduced in proportion to the amount of under-insurance.
The policy covers your assets on the basis of replacement conditions (i.e. new for old), so the Insured value should be the replacement cost of building(s) constructed in same materials as already there.
It does not matter that it can be done differently in alternative materials; the standardised measure replaces the existing new for old.
So the starting point for determining a Sum Insured is to look at what the cost to rebuild the property would be using similar materials.
Also, consider that there are other expenses to be factored into the building Sum Insured such as:
- Cost of demolition and removal of debris if the site has to be rebuilt totally. This should include an allowance for excavation as part of the demolition.
- Where the building is an older building, rebuilding after a major loss may see the application of updated local planning rules which may impact on any rebuild. For example:
- The requirement to install disabled access, showers and toilets which may not be in the current structure -and must be included under a revised code; or
- Fire sprinklers or mandated safety features such as additional fire exits; or
- Environmental improvements such as solar panels, water recycling or other passive energy use design features may now be required.
- Cost of architect’s fees for plan/design submission to local authority/building development assessment panel; and engineering costs.
- If the site is in a residential area, noise and dust resulting from any repairs will have to be suppressed, so the neighbouring properties are not inconvenienced. This may also impact on the value to be insured as it will impact on rebuild costs.
Finally, if it is a cost of (say) $1,000,000 to rebuild now what is the impact of inflation on building materials/labour cost in the coming 12 months? This should be considered and an allowance be made for this.
If there has been no movement in the declared values of the property for 2 years or more, it is likely to be underinsured and in the event of a significant loss there may not be adequate insurance cover to meet the loss.
It is important to keep in mind that your Sum Insured should not focus only on the main building; it should include improvements to the site. These would include such items as fencing, outbuildings, lighting, and other facilities.
Contents in the building:
Contents in the building are also Insured for replacement value, and the Sum insured must stay relevant to the cost of replacing items at a value of new for old items. We recommend you review the values for these assets at the same time you review your buildings.
What Does This Mean If There Is A Claim?
If you have a building which costs $1,000,000 to replace, but you have insured it for $500,000 your sum insured is only 50% of the actual replacement value of the building. This is underinsurance.
Scenario 1 – The roof blows off in a storm:
In a storm the roof blows off this building, at the claim is approved, the insurer will pay the claim in the same proportion as the ratio of underinsurance. Put another way you only get 50% of the cost of repairs because you have only insured for half of the correct insurance value of the building.
That is the financial impact of underinsurance if you have a partial loss
Scenario 2 – The building is destroyed:
If that building is 100% destroyed and the claim is accepted. In the case where the claim results in a total loss, then the insurer will likely pay out the $500,000. This is then leaving you $500,000 short of the notional rebuild cost.
That is the financial impact of underinsurance in a total loss.
This is why the Sum Insured must reflect what the cost would be to rebuild new for old with an allowance for the other factors that have been highlighted in this article.
At this point, you may ask why don’t we put your insured values up annually? The simple answer, we are not valuers. It is your building (and your contents) The onus is on your committee to have the right sums insured. By obtaining an insurance valuation, a thorough assessment of the rebuild cost of the property will be conducted. Insurance valuations take into account everything from the size, to the building specifications to the internal finishes.
We hope this article has given you some more information about how to effectively manage your Property and Asset Insurance and the importance of ensuring the Sums Insured are maintained up to date as per the value of your property, contents and general infrastructure.
If you have any questions regarding insuring the loss or damage associated with fire, theft and accidental damage, please contact LCIS today.