Insurance valuation of real estate is widely misunderstood. And this misunderstanding is a threat to real estate investment. Under insurance of property can lead to a huge loss if the cover falls short of the damage suffered. Over insurance on the other hand is a big mistake. You only end up paying higher premiums where you can save and put the money to better use. Such better uses include repairs and maintenance of the property.
The Basis of Insurance Valuation
The purpose of insurance is to compensate you should your property be damaged. If you own a house and it is destroyed, either partially or totally, you would want the building reinstated. This points to the direction that the basis of insurance valuation is Reinstatement Cost. Reinstatement cost alone however, is not adequate. In the remainder of this article, I discuss the key items the valuer considers in the assessment of the insurance value of real estate.
1 Reinstatement Cost
In assessing the Reinstatement Cost of a property, the valuer makes two assumptions. First, that there will be total destruction of the property. This assumption is reasonable because it is the maximum damage that can occur to the property. Second, that land is not destructible. It is quite remote that land will be destroyed. This means it is the building component only of real estate that is considered in insurance valuation.
Reinstatement means erecting a similar building at current construction costs. No deduction whatsoever should be made on account of depreciation. Any amount less depreciation amount will only lead to incomplete building.
2 Debris Removal
Following total destruction, there will be building remains, such as broken foundations, walls, etc. on the site. These will need to be cleared before any construction can commence. An allowance therefore ought to be made for removal of debris.
3 Professional Fees
Before you commence construction, you will need an architect to prepare the building plans. A quantity surveyor, engineers etc are equally important to ensure the building is re-constructed to specification, in time and within budget. For their services, you will be required to pay fee, usually a percentage of the cost of construction. Professional fee is therefore included in the computation of insurance valuation.
4 Loss of Rent
Loss of property is instant. However, investigations, assessment of damage, compensation and rebuilding take time. It is therefore important to include loss of rent, or cost of alternative accommodation over such reasonable period. This ought to be computed at current market rent.
Apartments (flats) are worthy of special consideration in insurance valuation. In a centralized management, insurance is usually handled collectively. This means all apartment owners contribute on pro rata basis to the insurance of the apartment block. In the absence of such system, or where the apartment owners are separately responsible for the insurance of their apartments, the apartment should be insured at market value. This will safeguard you in the event that one or more apartment owners are not adequately covered. Can you imagine what would happen if one, two or many other apartment owners in the block are not covered? You may never be able to have your apartment back. You can, however, be adequately compensated given a similar apartment elsewhere, or a sum equivalent to the market value of your apartment. In addition, loss of rent or cost of alternative accommodation ought to be considered.
In conclusion, you should at all times ensure your property is insured at the right insurance valuation. Insurance valuation includes; reinstatement cost, cost of debris removal, professional fees and loss of rent/ cost of alternative accommodation. The perfect insurance you need.
Registered Valuer, Registered Estate Agent & Registered EIA Expert
Real Estate Consultant at Tysons Limited, Nairobi-Kenya
Personal blog: www.StephenOmengo.com
Personal email: stephen@StephenOmengo.com