Many property owners make the mistake of basing their property’s insurance value on its estimated market value because they confuse the two values. In doing so, their property may be over or under-insured - neither of which is desirable.

Determining replacement value

While an estate agent can determine the value for which your property will likely sell on the open market, an estate agent is not qualified to determine a property’s replacement value. Defined as the value at which your property must be insured to provide sufficient cover, a property’s replacement value can only be assessed by a qualified and experienced professional valuer.It is important to remember that this professional estimation is based on the cost to demolish and reconstruct the building to the same specifications in the case of total destruction, for example, a fire. This cost must cover the cost to demolish and remove rubble, and include all professional fees, such as services offered by architects and engineers. This worst-case scenario is necessary to ensure that you have sufficient insurance cover for any possible eventuality.

Over-insurance

In most circumstances, a property’s replacement value will be lower than its market value. If the owner uses their property’s market value (for example, R2 million) for insurance purposes when the replacement cost is R1.4 million, it would result in that property being over-insured with an unnecessarily inflated insurance premium.  

Under-insurance

A few years ago, we dealt with a case involving a large home located in a remote rural area. Our valuer assessed the replacement cost to be R3.5 million at the time.The remote location meant that the replacement cost would be on the higher end due to the distance from suppliers of building materials and other goods required in reconstructing a building, increasing the overall replacement cost.This particular client had his home ‘valued’ by an estate agent for around R1.5 million and used this value as the property’s replacement cost for insurance purposes. This means that their property was insured for only R1.5 million while it would cost R3.5 million to rebuild in the case of total destruction, resulting in the property effectively being under-insured by R2 million, or by 57%.

The consequence

We have found that an alarming number of property owners are over-insured – often by 50% or more - due to being unaware that they need to obtain insurance cover for their home’s replacement cost and not the market value. You may prefer to rather be over-insured than under-insured, but if you add the unnecessarily increased insurance premium up over a year or two, you have a very prudent reason to get a valuation done to determine an accurate replacement value.Without a clear understanding of the difference between market value and replacement cost, the property owner may face the undesirable reality where the insurer applies an average at claim stage due to the building being under-insured. This means that the owner’s claims will not be paid out 100%, but rather in proportion to the ration of under-insurance, i.e., if the property is under-insured by 50%, the insurer will only pay half of the claimed amount.

Written by Björn Laubscher 

Björn Laubscher is Managing Director of Mirfin Valuation Services which offers professional and comprehensive insurance valuations for community schemes. A pioneering web-based quoting system takes the pain out of getting an insurance valuation quote, saving trustees and managing agents time and providing instant quotations. Visit www.mirfin.co.za

Attention: Short-Term Insurance Brokers A Professional Valuation is Vital Experience has taught us that approximately two thirds of all residential homes and contents are underinsured by between 20 - 50%.

The reality is that very few property owners are correctly covered. A professional valuation is not expensive Unfortunately, many people still shy away from getting a professional property valuation done as they assume that it will be too costly. Some prefer to either rely on an estate agent's free guesstimate or to simply insure their home for its purchase price or assumed market value.

A professional valuation helps brokers We beg to differ. A professional valuation can be quite affordable and certainly is money well spent when considering its many benefits - particularly for the insurer:

1. Attract new clients: Offer to share the cost of a professional valuation
2.  Add value to your service: Offer to scrap the 'average' clause.
3. Pass on the responsibility: Let the valuer recommend a sum insured.
4. Improved client care image: Happy clients tend to be more loyal to their broker or insurer.
5. Increased earnings: More correctly covered clients converts to a higher premium income.
6. Reduce your costs: Fewer client disputes reflect favourably on your claims handling costs.
7. Less insurance fraud: Reduce the incidence of fraudulent claims through proof of ownership.
8. Lower loss ratio: Higher premiums, lower costs and less fraud.
9. Competitive edge: Lower costs allow you to price your short-term offerings more competitively.

Advise your clients on the benefits they will enjoy with a professional valuation in hand, e.g. having the assurance of being adequately insured with full recovery in the event of a claim. No averaging and no disputes! Contact us for a quote today. Another blog you might enjoy: Our checklist for insurance valuations. Mirfin Valuation Services offers professional and comprehensive insurance valuations for community schemes.

Our pioneering web-based quoting system takes the pain out of getting an insurance valuation quote, saving trustees and managing agents time and providing instant quotations. Website: www.mirfin.co.za Email: This email address is being protected from spambots. You need JavaScript enabled to view it.