Building Evaluations and how to Insure your Clients’ Right

Building Evaluations and how to Insure your Clients’ Right

Accurate building evaluations form the cornerstone of securing appropriate coverage and premiums in an insurance policy. Inadequate valuation of properties hampers the ability to fully rebuild a building after a loss. This affects insurance clients, insurers, and brokers alike. Ensuring accurate value assessments helps prevent costly surprises at claims stage.

Understanding Building Replacement Cost

Building Replacement Cost is the estimated expense of rebuilding a property from the ground up, including materials, labour, and associated costs, in the event of an incident. This concept is crucial for both personal short-term insurance and commercial insurance considerations.

Accurate Assessment of Building Replacement Cost

A critical step in insuring clients right, is for brokers to accurately determine the replacement cost of the building to be insured. Education is the most effective tool in this endeavour. It's not about the market value of the property or its purchase price but rather the cost to rebuild the structure to its original condition, considering all associated expenses.

Property owners often mistake market value for replacement cost and it is one of the broker’s responsibilities to ensure the correct valuation, meaning the rebuilding cost is used for insurance purposes.

Why Building Replacement Cost in Insurance is Important

Accurate building replacement cost is a vital factor for insurance companies when determining the appropriate coverage for a client’s property. It enables the tailoring of insurance policies to offer sufficient protection in the event of a total loss, ensuring property owners can restore their property to its pre-loss state without facing significant financial strain.

Underinsurance poses a risk where policyholders might receive only a fraction of the actual cost to repair or replace their damaged property, which can be financially devastating. Some insureds may not be aware that their property values have increased or that replacement costs have risen significantly, highlighting the need for regular reassessments. Coverage should ideally match the rebuilding cost estimate, with all insurers requiring it.

Factors Influencing Building Replacement Cost

Several factors influence building replacement cost as can be seen below. It should also be noted that replacement cost is a dynamic figure, which varies based on individual circumstances, and changes over time due to property modifications.

1. Construction Costs: Building material and labour prices vary based on market conditions, geographical location, structure complexity, and economic factors. This includes the main building and any outbuildings such as detached cottages, garages, carports, swimming pools, and sports courts.

2. Size, Layout & Roof Type: Replacement cost is calculated per square meter, so larger or intricately designed buildings requiring specialised skills or materials will have higher costs. The quality of fixtures, flooring, and mouldings, as well as the type of roof, also impact the overall replacement cost.

3. Building Regulations: Older buildings may require costly upgrades to comply with current building codes, particularly for electrical and plumbing systems.

4. Paving & Security: Perimeter features, paving, decking, electric fences, energisers, and gates should be included in the valuation.

5. Professional and Municipal Fees, Demolition and Removal Cost: These costs are often overlooked as they are not thought to form part of building replacement. However, these costs can be substantial, especially if one considers that it includes preparation of the land for reconstruction.

6. Additional Improvements: Any additional property improvements, such as boreholes, security systems, Jacuzzis, spa baths, saunas, thatch umbrellas, aluminium awnings, automated garden sprinklers, the adding of a carport and the number of geysers, must be reported to the insurer for updated valuations.

7. Inflation: Inflation and fluctuating material and labour costs must be considered on a regular basis.

What is the Value-Add for Brokers?

Accurate building valuations enable brokers to add significant value to their clients. Beyond offering essential risk mitigation advice, brokers can assist clients in leveraging technology that analyses building values based on key information. This includes using third-party products to estimate a property's worth.

In addition, pro-active measures to keep property valuations up to date can strengthen a broker’s relationships with underwriters, making it easier to secure appropriate coverage at competitive rates. Understanding building replacement cost empowers brokers to make informed decisions, helping them tailor insurance policies to meet their client's specific needs.