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Explaining Replacement Cost vs. Market Value

Article as received from MirFin, Countrywide Property Valuations.

Being in the property valuation game, we find ourselves explaining to clients almost daily why it is wrong to insure one’s building for purchase price or current market value.

Just recently, a client requested that we assess the value of his residence for the purpose of updating his insurance policy. What we found was an upmarket house with high-end finishes, yet in a poor state of repair and in a not-so-affluent neighbourhood; following a physical inspection of the premises, we assessed the insurance value to be in the region of R4 300 000, not including the moveable contents. Within moments of having submitted our valuation report, we had an infuriated client on the phone, alleging unprofessionalism and demanding a full refund seeing as he had purchased the property for a mere R2.5 million just two years ago. In his opinion, insuring the building for R4 300 000 would be an utter waste of money.

We proceeded to explain to this gentleman that the particular location and poor condition of the building have an adverse effect on his property’s market value, yet in the event of total loss it still would cost around R4 300 000 to clear the site of rubble and re-build the house to the same specifications. At a sum insured of R2.5 million, the client was underinsured by more than 40% , meaning that the insurer would pay out only 60% of an eventual claim amount.

The reality is that many property owners are underinsured – not seldom by 50% or more – due to being unaware of the concept of obtaining insurance cover for ‘replacement cost‘ and not ‘market value’.
(Can it be safely concluded that a higher incidence of adequately insured clients will lead to an increase in book value for insurers?)

Please click here to obtain a free quotation for a replacement cost valuation on buildings and/or contents.

Yours sincerely,

Björn Laubscher
Managing Director

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