A property that would sell for a certain figure does not cost that figure to rebuild, and the gap runs in both directions. A market valuation asks what a buyer would pay for the property as it stands, land included. An insurance assessment asks something else: what it would cost to build the improvements again on the same site, to the standards that apply at the time, with everything such a project drags in behind it. Treating one figure as a proxy for the other is the most common reason a claim falls short.

Two different questions

Market value is reasoned from evidence, meaning settled sales of comparable properties adjusted for their differences. Replacement cost is built up from the building itself, measured and costed element by element. One is comparison, the other is costing.

The land makes the difference plain. Land does not burn. On most Brisbane residential properties the site is the largest single component of market value, and it forms no part of a rebuild estimate, because the site is still there the morning after the loss. A correct sum insured on a well located inner suburban block can sit a long way below market value, while in a regional town where land is cheap and construction is not, the position reverses. Neither result is an error.

What a rebuild figure has to cover

A replacement cost estimate is not a builder’s price for a similar looking new house. A total loss sets off a sequence of costs well before a slab is poured, and the estimate has to carry all of them:

  • Demolition and removal. Making the site safe, demolishing what survived, then removing and disposing of the debris, including hazardous material such as asbestos in an older dwelling.
  • Professional and statutory fees. Design documentation, engineering, surveying, building certification and the authority charges that go with them. All of it is spent before construction starts, and owners routinely leave it out.
  • Compliance with current requirements. The replacement has to meet the codes and standards in force when it is rebuilt, not the ones that applied when the original went up. Energy efficiency, wind loading, plumbing and wiring standards. An older house is seldom rebuilt as it was.
  • Site conditions and access. Sloping ground, retaining, drainage, a narrow frontage, limited crane or truck access. Two identical houses on different sites do not rebuild for the same figure.
  • Escalation over the rebuild period. A claim is not settled and completed on the day of the loss. The estimate needs an allowance for cost movement through the policy period and the months of design, approval and construction that follow, longer still when an event hits a whole region at once.
  • Everything outside the walls. Driveways, paths, fencing, retaining walls, decks, pools, solar, water tanks, landscaping and outbuildings. Owners picture the house and forget the rest of the site.

Whether the sum insured is stated inclusive of GST, and what the policy allows separately for temporary accommodation, contents or loss of rent, are questions of policy wording. The estimate is one input to the cover, and it should be read against what the policy actually promises to pay.

Replacement value and indemnity value

Two bases of cover sit behind the language. Replacement or reinstatement value is the cost to build the improvements new. Indemnity value is that cost reduced for age, wear and condition, so the payment restores the position held immediately before the loss rather than handing over a new building in place of an old one. Most domestic policies are written on a reinstatement basis. A report can carry both, stating the basis of each figure, the date of assessment and the rebuild period assumed.

How under-insurance happens

Almost nobody decides to be under-insured. It accumulates. A sum insured is set at purchase from an online calculator fed an approximate floor area, then never revisited. A renovation adds a room, a deck and a pool, and the policy renews unchanged. Sometimes the figure was never a rebuild cost at all, because the owner insured for the purchase price or the mortgage balance, which measures the lender’s exposure and says nothing about a building site.

The consequence arrives at the worst possible time. A total loss is capped at the sum insured, so any shortfall falls on the owner while they are also paying to live somewhere else. Partial claims can go worse than expected, because some policies carry an averaging provision that reduces the payment in proportion to the shortfall. Whether one applies is a question of policy wording.

Strata schemes in Queensland

For community titles schemes the sum insured is not a matter of preference. Queensland’s body corporate legislation requires a body corporate to insure the building for its full replacement value, and it requires the cover to take in more than the structure: costs incidental to reinstatement, including the cost of removing debris and the professional fees the rebuild will need. The legislation also calls for an independent valuation periodically, not indefinite reliance on an indexed figure.

Which party carries the building cover depends on the plan format, and that is worth confirming rather than assuming. In building format schemes the body corporate insures the building. In some standard format schemes, where lots hold freestanding houses, the owner may insure the dwelling while the body corporate covers common property.

A scheme assessment takes in the building along with common property structures, plant, pools, car parking and fencing. Letting it go stale is a governance failure the committee explains to owners afterwards.

When to revisit the sum insured

A formal assessment is usually commissioned on a cycle, with indexation between assessments and the next brought forward whenever something changes the building or the cost of building it. That means after a renovation, extension, deck, pool or new outbuilding; after a change in the use of the property; after a period of sharp movement in construction costs; and when a scheme’s valuation cycle falls due. Renewal is the natural prompt to ask whether the number still describes the building.

Setting the sum insured is the owner’s call, or the body corporate’s, taken with the insurer or broker. What a valuer supplies is the dated, documented assessment that decision rests on.

If a policy is coming up for renewal, a scheme’s valuation is falling due, or there is doubt about whether the sum insured would actually rebuild the building, call the practice on 07 5550 4055 and talk it through.