Importance of an up to date Replacement Cost on your commercial property
- Jeremy Rutledge, Certified Practising Valuer

Under insurance is the result of nominating a value for an asset such as your commercial property that is too low to actually replace it in the event that it is lost or damaged.

An example is a commercial property insured for $700,000, but replacement cost is $1,000,000 and is destroyed by fire. In this instance, the owners may be responsible for the difference for at least $300,000 in excess of the insurance payout, depending on the wording of the policy, to replace the building.

Strata legislation requires that property is insured for its ‘full replacement value at the time of the loss’, but unfortunately many properties have not been reviewed for some years which can have devastating consequences for unit owners, as well as being in breach of strata regulations.

There are many reasons why your sum insured may not adequately reflect the value of your property and some of these include:

Renovations and improvements
Building additions or extensions increase the insurable value. If these improvements are not disclosed, there will not be coverage for financial restoration of these additions.

Rising building costs
Insurance cover is typically increased by the Consumer Price Index (CPI) at renewal, however construction costs (including rising material & labour costs) regularly increase at a rate which is greater than the CPI. This means that the compounding effect of this disparity between the CPI and construction costs could leave the replacement cost higher than the insured amount.

Changing standards
Building and town planning regulations change regularly and in most cases are becoming more stringent which means the length of time to rebuild may increase, or in fact may prevent the same type of building being rebuilt.

Replacement Cost is not Added Value
Depending on the policy wording, in most instances the “added value” of the building should be disregarded when calculating replacement cost for insurance purposes – if destroyed by fire, replacement cost of the building in most instances would be substantially more that its “added value”.

DON’T GET CAUGHT

Valuers & Quantity Surveyors are best equipped to accurately assess Building Replacement Cost for insurance purposes. Asset Advisory Property Consultants specialise in assessing insurance replacement cost for all building types, ensuring that owners have an insurance policy which adequately covers these valuable building assets.