Getting the initial insurance replacement value for a property right is more important than you may realise.
- It ensures insurance cover for that policy period is adequate in the event of a claim.
- By establishing an accurate starting point, it significantly increases the odds of future insured amounts also being appropriate.
It seems logical that the person who built the development and knows its original construction cost will be best placed to set its initial insured value. Surprisingly, this may not be the case.
Fit for intended purpose
Although always a valuable starting point, the original construction cost may not accurately reflect the cost to reconstruct your development during the insured period.
- If the building had an extended construction period the original construction cost will already be out of date.
- If the building was constructed by a large developer or as part of a larger development, there may have been economy of scale savings that will not be available in a one-off reconstruction project.
- Construction project costs are not compiled with a view to complying with insurance policy and strata legislation requirements:
- they may include expensive site works (such as bulk cut and fill) that will not be required for reconstruction of the building,
- they don’t include allowance for insurance components such as demolition and inflation increases during the future reconstruction contract, and
- they are likely to include items such as carpet flooring that will be covered by contents insurance.
The Chinese whisper effect
Original construction costs obtained by word of-mouth are particularly unreliable as you don’t know which of these cost components, or other development costs such as finance and marketing fees, may have been included. In some cases the cost provided may even be intentionally misleading.*
The bottom line
The original construction cost is useful and should be provided to the person preparing your replacement building insurance valuation – but it should not replace an independent valuation, professionally prepared specifically for insurance purposes.
*See our blog titled “The Problem With Developer’s Replacement Valuations”.