Property: Be Assured, Get Insured

02-Mar-2011 The topic of insurance always seems to divide people into two camps. The first camp pertains to those that decide to ‘wing it’, after all why pay the insurance companies anything for something that may never happen. The second camp are those that decide to act responsibly and at least try to cover themselves should some untoward event occur. That is the point of ‘insurance’, you never can tell what is around the corner and should something happen it is a great relief to know that your insurance will cover the loss you expect it to. The point of this article is the frequently asked questions we get as Registered Valuers that relate to the asset involved.

It's important that your assets are properly valued

The value of any asset or assets directly affects the amount you are insured for; the premium you pay and the amount you receive in the event of a loss. Therefore, it is important that your assets are properly valued and that the value is kept updated. There is no point in going to all the effort of insuring your assets only to discover that in the event of a loss the replacement value was not properly analysed or has been left so long that it no longer sufficiently covers what is required to cover your loss.

The risks are clearly increasing too

Apart from the everyday calamities that can affect us from a floods, fire or theft, Mother Nature has also dealt some severe hands with regard to the extreme weather we have experienced over recent years. Her indelible mark on our assets is always random, normally ferocious and often very destructive. Therefore ValGroup advocates the view that you cannot afford not to have adequate insurance cover to protect your assets.

After all, you have worked hard to achieve what you have, why would you not want to protect and preserve what you have created? When you are a property owner, insurance of that asset is absolutely critical.

Residential is easy, cover is simply arranged on the replacement of the same floor area of your home. However, if you have a very large home (over 500m²) the insurance company may require a valuation. Interestingly, in the last few years insurers have moved to farm buildings being on a square meterage basis in the same way as residential properties. Policies are still written on both sum insured and square meterage at present. However, there tends to be great difficulty in getting farmers to take the time to measure each building.

For commercial property you will either have an Agreed Replacement Value (ARV) - this is an amount agreed between yourself and the insurance company which will be paid out in the event of loss or Replacement Value (RV) which requires a valuation to assess what the replacement value is. ARV is an informed or intelligent guess at the replacement value from someone who is not an expert and you may be we well under or over insured. This ‘guess’ at a replacement value also needs to include an amount for demolition.

“You don’t have to pray to God anymore when there are storms in the sky, but you do have to be insured...”
Bertolt Brecht

The ARV is the total amount the insurer will pay and if there is a total loss and the site has to be cleared before re-building; demolition comes out of the same ARV sum insured. You can see therefore, that there will be even less dollars available for the actual rebuilding.

In the same way this ‘guess’ will most likely not take inflationary provision into account, so with a loss near the end of the insuring terms, it makes it even more unlikely to have an adequate replacement sum insured. Whichever way the ARV is the maximum payout in the event of loss.

Undertake a fresh assessment annually

RV is an accurately assessed value that will replace the building lost or damaged with modern materials. You are adequately covered and paying a premium that is at the right level. With the general upward trend of premiums we have seen a downward trend in the frequency property owners value their assets or even renew their insurance cover.

It is still a fact that paying a premium still turns out to be the lesser of two evils should you ever experience a loss. Underwriters vary with their policies, for instance one underwriter has a policy of allowing ARV up to $500,000 then a registered valuation is required. They do however have a ‘grey’ area of $500,000 to $1,000,000 where they will accept ARV if you can convince them that the client has a reasonable basis for nominating a sum insured in this value range.

For anything above $1,000,000 a valuation is required by a Registered Valuer. That, together with the way construction costs have dramatically increased over the last 24 months, Valgroup strongly recommends you undertake a fresh assessment annually when your policy is being renewed. For smaller structures biennially is often adequate.

As part of your insurance policy the Fire Service Commission charges a levy on the value of the assets insured against the risk of fire. This levy is payable on the sum insured, however, where cover is on a reinstatement basis, the levy need only be paid on the indemnity value if:

• a valuation certificate has been obtained clearly establishing the indemnity value of the property. This must be no more than two years old
  or
• a declaration is signed by yourself stating the declared indemnity value is fair and reasonable.

As a very minimum, as a proprietor you should be instructing a valuation of your assets for insurance purposes at least biennially, preferably annually. For those of you in the first camp I urge you to give this topic your serious attention and join those in the second camp. Should you require any further advice regarding any of the issues in this article please do not hesitate to contact a member of ValGroup.

By Paul Harvey
Williams’ Harvey Registered Valuers