Insurance Valuations - how they are done

As an OC Manager/Asset Manager or an Insurance Broker, who often orders valuations for insurance purposes, it is important to have a basic understanding of the process involved so you can answer questions posed to you on the topic.

First, lets get one thing out of the way. Insurance Value is NOT related to the Market Value of the property. It seems obvious to say so, but to many it is confusing. For a clear explanation of why they aren't related see this post. An Insurance Valuation is a document outlining the total estimated liability in the event of a total loss. In other words it answers the question, how much could it cost to demolish the damaged structure, remove the debris and rebuild to the same extent as previously existed.

The best way to answer this question is to obtain an Insurance Valuation on your property. The valuation is a legal document and can be relied upon when deciding on a 'sum-insured' or Reinstatement with New Value.

The process is as follows:

  1. Send instruction to valuer to provide an Insurance Valuation detailing the address and providing any information that would be helpful such as plans, access details etc.
  2. The valuer will inspect the property and take detailed notes and measurements of the buildings.
  3. Back at the office, the valuer will then formulate a cost schedule simplified as follows:
    • Amount for demolition and removal of debris: eg $50-$150/m2
    • Reconstruction of building components: eg $2500/m2 for main building, $700/m2 for terraces plus external areas, extra fitout, fencing, paving, landscaping.
    • Allow for cost escalations over the development period as prices for construction creep up over time (currently around 3-4% per annum) which need to be factored in, as there will inevitably be a delay of several months or even years prior to reconstruction.
    • Contingency allowance - depending on the nature of the property this could be anywhere from 3% to 10%
    • An allowance for professional fees ie architects, engineers, consultants etc. Again the allowance will depend on the nature of the building. More complex buildings with lifts, sprinkler systems or heritage issues will impact this
    • Statutory fees - an allowance for any connection costs or contributions required to be paid to local authorities
    • Cost escalation in lapse between policy renewal dates (12 months) - we need to assume that the disaster will occur on the very last day of the policy year - at which point the rise in costs will be at its maximum.
    • GST treatment - generally both figures are provided. If an entity is registered for GST then the GST exclusive figure can be used (double check with your broker)
  4. The valuation report is compiled with descriptions, building areas, photos and the breakdown of costs including the final Insurance/Replacement Value and sent to the instructing party.

It is always a good idea to get a sample report prior to providing an instruction for a valuation. It is also recommended to ask for the valuers Professional Indemnity insurance policy and make they have cover for at least $5-10 million depending on the size of the buildings being valued. More is always better. Remember you are also buying the valuers PI policy when you are paying for their report and relying on it as a professional opinion.

Feel free to get in touch