Commercial & Industrial Building Valuation for Insurance Purposes
Insurance valuations are usually required by insurance brokers/companies every 2-3 years. To assist in the understanding of terminology we have included the following brief explanations. In almost all cases a fee quote and timing will be provided before any valuation is commenced.
Reinstatement Cost
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Reinstatement cost is sometimes referred to as the cost of reinstating an asset to an as new condition or new for old. The reinstatement costs notionally assumes a total loss.
In the case of partial loss, reinstatement cost also covers the cost of repairing the property insured to its condition when new. The extent of damage and therefore the cost of repairs cannot be anticipated prior to the actual loss occurring. The cost of repairs may be more or less than the reinstatement cost of the property insured.
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To the extent the estimated cost of repair is greater than the estimated cost to completely replace or reinstate the property insured, it is to be assumed that the insurer would seek to completely replace or reinstate, rather than repair the property insured. In any case, the assessment of repair costs is typically within the area of expertise of a loss adjuster or loss assessor and can only be completed after the loss has occurred.
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It can be seen therefore, that seeking to estimate the cost of repair is neither possible nor relevant when completing valuations for the purpose of setting the amount of cover.
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The sums insured under a reinstatement insurance policy usually include the following elements of cost:
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Reinstatement cost estimates.
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Fees and contingencies.
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Estimates in respect of cost increases during the policy, lead time and reconstruction periods.
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Demolition and debris removal.​
Reinstatement Cost Estimate
The definition which is included in our valuation form has been defined in line with common insurance valuation practise in New Zealand as:
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“an estimate of the cost, as at the date of valuation, including relevant fees, of replacing the asset with a new modern equivalent asset, including where appropriate the use of current equivalent technology, materials and services. This is intended for the purpose of assisting the parties to the insurance contract in negotiating insurance premiums and, unless specified elsewhere, is not based on a detailed elemental and schedule of quantities approach as would be undertaken by a quantity surveyor or costing engineer. In construction unanticipated problems often arise and actual rebuilding, repair or replacement costs may vary from the estimate.”
Inflation Provision (Reinstatement Cost)
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This is the estimated cost inflation during the 12-month insurance period, lead time and construction period. It should be noted that no allowance is made for any delay due to the need to comply with the provisions of the Resource Management Act including possibly the requirement to reinstate on an alternative site. This time allowance will vary due to changes in the market such as securing contractors and others vital to the building process.​
Indemnity Value Estimate
This is the estimate of the loss that would be suffered by the insured in the event the asset was destroyed.
The indemnity value estimate is normally calculated by depreciating the replacement cost, unless the client specifically requests a “market indemnity”. This would require the market value of the whole property less the market value of the land only, to provide the residual "market indemnity" of the building and site works.
Indemnity values are also provided for the purposes of calculating Fire and Emergency Levy's.
Functional Replacement Cost
Functional replacement cost is the estimated cost required to replace all assets with new assets that perform similar tasks but under optimum current design and layout conditions with capacity requirements not greater than currently available.
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This would apply to assets unlikely to be reinstated to the same extent, or to the same design or construction material as existing. This would be required when demand necessitates a smaller or different asset due to changes in technology, economics, and other factors.
Demolition Estimate
This normally assumes that the total asset to be demolished has been damaged beyond repair. The demolition estimate covers the cost of demolition and removal of debris of the asset, excluding the cost of removal of any noxious materials such as asbestos, or removal of debris on adjoining premises. It also includes the estimated cost of dumping the debris.
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Where there is generally known presence of asbestos or similar hazardous material, (whilst excluded from the assessment) this will be noted.
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The demolition estimate does not include for shoring up any structures, either on the insured property or neighbouring properties. Furthermore, it does not include for the removal of any building contents.
Valuation Date
This is the effective date of valuation, which will usually be the date of inspection.