Insurance Information

We are often asked why we encourage commercial building owners to get valuations every two years. Many owners see this as an additional cost that they do not need to have. However, given that the main reason for having insurance is to protect the owner from the big event then it is really important to make sure that your policy covers you for the full replacement of your building. 

During the last two years there has been some large increases in building replacement costs because of the rise in labour, compliance and material costs.

According to John Lucas of the Insurance Council of New Zealand labour costs in the industry have risen because of the recent boom; Building Consent costs have easily doubled with the tightening of the Building Act; and the cost of materials has also grown significantly.

In this article, John Lucas writes: “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 last 2-years, and their building replacement valuations are not current.”

Lucas further point out the same could well apply to those companies who have specialised plant that their businesses are dependant upon. “Specialist plant used in New Zealand’s industry is at risk of being under-insured if new valuations are not obtained annually. Plant costs have increased due to rising oil and steel commodity prices. If there is a significant fall in the New Zealand dollar this year, this may add to the problem.”

As a real-life example, the Insurance Council is aware that a number of commercial buildings that were damaged in the December 2007 Gisborne earthquake were under-insured.

By all accounts their concern was that the cost provision for Demolition was nowhere near enough to the actual Demolition Costs or, in some cases, there no provision made for this at all.

When a valuation is obtained for insurance purposes (as opposed to one for market valuation/mortgage purposes) there are five important figures provided and these are used to calculate the full replacement value of the building and the Indemnity Value (the value of the building at that time being a depreciated value). These figures are recorded on the insurance schedule and become the basis of settlement in any claim situation. If a building is completely destroyed and these figures are well below replacement then you as a building owner could well find yourself with either a much smaller building or a big bill!

One of the numbers a valuer will record in a valuation is a provision for Demolition and Removal of Debris.

The Insurance Council points out that “it is important that the demolition provision is accurate both for building and contents otherwise under-insurance could be the result. If demolition costs end up being higher than originally allowed for, there may not be adequate insurance to cover the replacement of the building and contents.”

They go on to say:

“Many Council and private landfills no longer allow the dumping of certain hazardous types of material such as asbestos roofing, which is so common on many 1960’s commercial premises, in their ordinary landfill sites. These types of hazardous materials need to go to licensed tips were permits need to be issued. The disposal of this type of material is significantly more costly that ordinary waste.

We wholeheartedly support the Insurance Council’s recommendation that building and plant owners obtain updated insurance valuations every 12-24 months from a registered valuer.