Insurance Certificates

VCL produce insurance certificates for Commercial, Industrial and Residential property. It is important that the building owner understands the extent of the insurers liability in the event of a disaster. Unfortunately, many New Zealand properties are under insured.

Insurance valuations, or more properly the provision of insurance certificates, are more common with commercial rather than residential property. However with particularly specialised designed or expensive properties maintaining an up to date insurance certificate is prudent.

Failure to keep up to date with current construction costs could mean that your property is UNDER INSURED.

Insurance Valuations differ substantially from standard market valuations in that the values being calculated are mainly concerned with the replacement of the asset in the event of a disaster.

Items Specified in a Valuer’s Insurance Certificate

The following terms headed in italics are included in a Valuers insurance certificate.

REINSTATEMENT COST

These are cost based calculations and are concerned with the current cost of rebuilding the insured asset if it were to be damaged or destroyed.

• Reinstatement Estimate:
  Is the estimated cost at date of valuation (including relevant fees) of reinstating the asset to an as new condition, including, where appropriate, the use of current equivalent technology, material and services. In the case of partial destruction no specific allowance has been made for any additional requirements that any Council, Government or other Authority may require as additional expenditure to upgrade, alter or amend the undamaged portion of the asset.

• Inflationary Provision:
  This amount has been estimated on the basis of a loss occurring on the last day of a 12 month insurance period, if appropriate. The inflation provision incorporates an allowance for the additional time required for damage inspections; demolition; preparation of new preliminary proposals and their approval by the Territorial Authority; preparation of working drawings and specifications; schedules of quantities; in addition to an estimated period of
  construction contract. No allowance is made of any delay due to the need to comply with the provisions of the Resource Management Act. All inflationary provisions are given without prejudice.

INDEMNIFICATION

The principal of indemnity is an insurance term. It is concerned with returning the insured to the same position as they were before the loss. The insured should be no better or no worse off because of the incident. The calculation can be cost based or it can also be market based (whichever gives the higher of the two values). For example say you were the owner of a well leased building whose market value (based on capitalised income) was more than replacement cost. The principal of indemnity should return you to that greater position.

• Market Related Value:
  Market Related Value is the estimated amount for which an asset leased at the market rent, if appropriate, should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing, wherein the parties had each acted knowledgeably, prudently, and without compulsion.
• Depreciated Replacement Cost:
  Is the Replacement Cost at the beginning of the insurance period reduced by factors providing for age and physical depreciation.
• Functional Replacement:
  Is the Estimated Cost required to reinstate all assets to perform similar tasks but under optimum current design and layout conditions with capacity requirements not greater than currently available. The value of any partial loss has been disregarded in this context.

DEMOLITION ESTIMATE

For the purpose of valuation, it is assumed that 100% of the assets have been damaged beyond repair and have no salvage value.

Unless otherwise noted in the valuation covering letter, Demolition Estimate covers the cost of demolition and removal of debris of the assets valued, but excluding the cost of removal of any noxious materials, or removal of debris on adjourning premises.

Are Some Buildings Under Insured

An article published by the Insurance Council of New Zealand indicated that many building owners are under insured.

In the previous few years New Zealand has experienced significant increases in building and plant replacement costs due to increased labour, compliance, and material costs.

Local Government compliance costs have increased significantly. The cost of building consents have nearly doubled due to the tightening up of the Building Act 2004 following the leaky building problem. The costs of building plans have increased (up to fivefold in some instances) to satisfy the additional requirements imposed by the above Act. Building materials such as steel, cement and other metals such as copper have also risen in price with many of these increases being driven by international demand from emerging economies such as India and China.

John Lucas, Insurance Manager of the Insurance Council said that many property owners have fallen into the habit of not obtaining annual insurance valuations, and therefore are relying on valuations that could be two or three years old. Property owners risk being under insured, especially when building costs have increased 25% or more over the previous 2 years, and their building replacement valuations are not current.

Specialist plants used in New Zealand’s industry are also at risk of being under insured if new valuations are not obtained annually. Plant costs have increased due to rising oil, steel and commodity prices. If there is a significant fall in the New Zealand dollar this may add to the problem, says John Lucas.

Businesses that are under insured run the risk of being caught short should a serious loss occur, which could have flow-on effects to the rest of New Zealand’s economy.

The Insurance Council recommends that building and plant owners obtain updated
insurance valuations every 12-months from a Registered Valuer.