Building Insurance Value – The Benefits of Getting It Right & Risks of Getting It Wrong
Since 2014, KBI has helped hundreds of Commercial Property Owners to insure their buildings. Every building is different, but all Owners and Managers are keen to ensure that:
If you hope to achieve these outcomes, then you must get your Building Insurance Value correct. The Insurance Value listed on your policy has to reflect your building’s Replacement Cost. If it does not, this can cause delays when lodging a claim, and a potential shortfall in cover.
What is Replacement Cost?
Replacement Cost is the estimated cost of rebuilding a premises. It includes construction costs like labour, building supplies and permits. It is not the same as Market Value, Purchase Price or other real-estate market calculations.
How do I cover my building for the correct value?
The best option is to seek expert advice.
There are two reasons we suggest talking to professionals. Firstly, Building Insurance Value is a complex topic. Secondly, getting it wrong can be very expensive.
The risk of over-insuring your building
If you have insured your building for more than its Replacement Cost, you are probably paying too much for insurance. You are paying insurance premiums based on an amount which you would never receive, even in the event of a total loss.
If you cannot claim for more than the cost of restoring your building to its pre-claim state, it does not make sense to cover more than that amount. You could be paying an extra premium, with no extra benefit.
The risk of underinsuring your building
According to Australian Valuers, most Owners under-insure their buildings by 25% or more. This is worrying. If a major claim arises, these Owners could be significantly out-of-pocket.
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:
Required Amount of Insurance
Actual Amount of Insurance
➤ 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.
The benefits of a professional valuation
Most Owners do not have funds on hand to cover large-scale rebuilding projects. For these buildings, the faster the insurance company processes the claim, the faster they can get back to operating normally.
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 3: There is less chance of disagreement
A recent and reliable building valuation limits the likelihood of your Insurer disagreeing over the value of your property. Your Insurer may not need to do their own valuation. If they do, you would expect their professional to come to a similar conclusion as yours.
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.
The benefits of using an Insurance Broker
The main benefit is peace of mind. We help Owners turn Replacement Cost Valuations into insurance policies that:
On top of this, your Broker may be able to use your valuation to save you money.
➤ In some cases, your broker can negotiate for lower renewal premiums based on goodwill.
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.
Putting it all together
When disaster strikes, the last thing you need is a building insurance policy that does not cover the full cost of rebuilding your premises. You can avoid a rude shock by working with a Broker and Valuer to build a policy that properly transfers the full financial risk associated with building damage to your insurer.
Do you have questions about building insurance? Get in touch. We would love to hear from you.
Have any questions?
Talk to one of our Commercial Property Experts today!
*The Content is for informational purposes only, you should not construe any such information or other material as financial, or other advice. This information is general and does not take into account your objectives, financial situation or needs. When considering the purchase of an insurance policy, you should consider whether the advice is suitable for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement.
KBI is a national specialist insurance brokerage that has rapidly developed a reputation for being the insurance partner of choice for the Commercial Property and Strata sectors, providing expert knowledge and specialised solutions across a range of asset types.
If you have any questions or concerns regarding commercial property insurance, please contact us directly, we’re happy to assist.