Property insurance, reinstate

In this second half of the two part article on Reinstatement Valuations, we take a closer look at some of the more contentious issues arising from reinstatement valuations for insurance purposes.

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Mr. Watson

As explained in the first article, a reinstatement valuation is a valuation of the cost to construct a building or other structure, taking into account all other relevant costs such as; demolitions, removal of debris and professional fees, at a point in time known as the valuation date, normally being close to the date the insurance cover is to commence.

However, most insurance policies require the amount of cover to be adequate not only at the time of taking out the insurance cover, but also at the time of loss which, with annually renewed insurance policies, could be nearly twelve months after the cover was placed.

In this regard, the question arises as to whether the original insured sum, based on the reinstatement valuation, which may now be nearly twelve months old, is considered to be sufficient to avoid the question of under insurance?

Adequate cover

This is of course dependent upon the rate of inflation in general and the rise in construction costs in particular, over the period between the date of the reinstatement valuation and the date of the loss.

In a normal market most insurance companies will consider the claimant to be adequately insured if the sum insured was based on a professionally prepared reinstatement valuation at the time of taking out the policy.

Some insurance policies may lend a greater level of certainty to this by stating that the sum insured should be within a percentage of the reinstatement cost at the time of the loss, generally 85 per cent, in order for the building to be considered adequately insured.

Therefore, unless the cost of construction has risen by 15 per cent since the date of the placing of the cover, unlikely in a normal market in Cayman, and the sum insured was based on a current reinstatement valuation, there should be no question of underinsurance.

It should be remembered that the reinstatement valuation is a valuation at a point in time and will not take into account any potential future increases in costs. In times of high inflation and increasing building costs, a prudent policy holder would be advised to add a percentage increase to the reinstatement value to ensure that they have adequate cover for the period of the policy.

Chartered Surveyors are not crystal ball gazers and are not able to predict the future, however a professionally prepared reinstatement valuation should provide a guide as to what may be an appropriate figure to cover any such increases in a ‘normal’ market.

Fixtures, fittings

Another area of contention has been with respect to what is actually included under the insurance cover for buildings in strata policies.

A strata’s insurance policy is placed to cover the strata’s property, generally considered to be the main structure, roof, floor, walls etc. and any common areas, such as walkways and hallways. The question arises as to whether it covers any elements within the privately owned strata units, and if so, which items?

When preparing a reinstatement valuation of a strata-ised development, the Chartered Surveyor will not only take note of the type of construction and level of finish of the main structure, but will also take into account the original fixtures and fittings within the strata units, such as floor finishes, kitchen cabinets and bathroom vanities. If the units were originally sold by the developer with kitchen and utility appliances, these will also be taken into account in the reinstatement valuation.

Although regard should always be had to the actual wording of the insurance policy, where there may be some dispute with the insurance company over whether these items are covered, if the sum insured is the same as the reinstatement valuation and the valuation report clearly states that such items as appliances are included in this figure, then it may be difficult for the insurance company to argue that these items are not covered.

It should also be noted that market practice is precedent and most local insurance companies are accepting that such items as ‘standard’ appliances in the strata units are indeed covered under the strata insurance. To avoid any such dispute in the future; however, a strata executive committee would be wise to ensure that the inclusion of fixtures, fittings and appliances is specified at the time of taking out an insurance policy.

When considering fixtures and fittings and the finishes within a strata unit it should also be remembered that cover under the strata insurance generally only applies to the original specification of the strata development. Any subsequent upgrades and improvements carried out by owners within their own strata units would be ignored in a reinstatement valuation for strata insurance purposes and should be insured separately by the individual owners under their own policies, unless they intend to self insure.

Simon J. Watson is the director responsible for Deloitte Property Consulting Services throughout the Caribbean. He is a Fellow of The Royal Institution of Chartered Surveyors, a founding board member of RICS Caribbean and the current Caribbean representative to RICS Americas. Simon has over 20 years professional property experience, with over 13 years in the Cayman Islands. Deloitte Property Consulting Services provide a comprehensive range of services including valuations and appraisals, quantity surveying, project management, contract and financial monitoring of projects, commercial property management and insurance claims adjusting services.

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