INSURANCE VALUATIONS – ANZ NOTE
Reproduced with permission

1.0 Introduction


1.1 Purpose

The purpose of this guidance note is to provide information, commentary, advice and recommendations to members undertaking valuations of property, plant and equipment for insurance purposes.

1.3 Scope
This guidance note applies to API members undertaking valuations for insurance purposes. PINZ members are referred to a separate guidance note specific to New Zealand (NZVGN 2 – Insurance Valuation Reports).
As there are many types of assets and various levels of reporting, the member should decide which matters are applicable and the extent of detail required to ensure that the client is adequately and appropriately informed.
This guidance note is not intended to outline methods of valuation of any particular type of asset but may comment on matters that should be addressed in reports in respect of certain property types or uses. Where appropriate, methods of valuation are covered in other guidance notes.

1.4 International Valuation Standards
This guidance note is intended to be consistent with the publication “International Valuation Standards 2005” as issued by the International Valuation Standards Committee.
However, there may be departures from IVSC Standards to reflect Australian law and practice.

1.5 The Role
In addition to the responsibilities covered in IVS 1, IVS 3, IVA 2 and ANZVGN 1 the Members role (subject to the scope of work agreed with the client) is to advise:

the replacement/reinstatement and/or indemnity value of the assets for insurance purposes at the date of valuation, in accordance with the requirements of policy wording.
factors that can or could impact adversely on the assets in respect of insurance issues. The Member may attempt to quantify the adverse impact or risk or draw the client’s attention to the need for re-assessment should these risks eventuate.

2.0 Instructions
2.1 Instructions from Client
All instructions to members to undertake valuations for insurance purposes should be confirmed in writing by the client.

2.2 Policy Issues
Clear instructions need to be obtained from the client confirming the scope of the work, policy conditions under which the assets are insured, and the extent of inclusions under the policy.

3.0 Report Content
3.1 Buildings
In addition to those items covered under IVS 1, IVS 3 and ANZVGN 1, a replacement/reinstatement and/or indemnity insurance valuation report for building and site improvements should include:

a replacement/reinstatement with new value and/or indemnity value as at the date required;
the extra necessary costs, if any, to comply with current building and fire regulations.
the cost of demolition and removal of building debris.
cost increases during policy period
an allowance for cost increases during lead time, ie the period after a major loss when debris is removed, building plans are drafted, and necessary approvals are obtained.
an allowance for cost increases during rebuild period.
estimated limit of liability.
a statement as to the treatment of GST.
a statement of specific valuation exclusions such as plant, equipment, tools, furniture and the like.
a full description of assets.
extent of betterment, if any, should the replacement asset be better or more extensive than its condition when new.
any change impacting on land value caused by loss
of the improvements should be noted.

The loss of rent may be required as a separate request to the insurance valuation

3.2 Plant & Equipment

For plant and equipment assets, report content should clearly state or explain the following:


the reinstatement/replacement with new value and/or indemnity value as at the date required.
the foreign exchange rates prevailing at the date of valuation for equipment manufactured overseas.
the treatment of obsolete assets.
the treatment of cost inflation.
the treatment of the cost of money during the replacement process.
installation and commissioning costs.
the treatment of debris removal costs.
the treatment of GST.
the extent of betterment, if any.
valuation exclusions such as landlord’s fixtures and fittings, stocks and materials in trade, and the like.

4.0 Insurance Policies

4.1 Policy Types


There are different types of policies available. The most common are:


4.1.1 Common Householders Policy - there are two main types:


 • common policies where the insurer may elect to replace, repair, or indemnify in the event of a loss;
replacement with new policies, which sometimes can have age provisions or can be regardless of age.

4.1.2 Industrial Special Risk (ISR Policy) - this policy addresses many areas in addition to asset insurance and is the most common policy for commercial/industrial insurance.


 4.2 Policy Wording
When undertaking an insurance valuation of improvements or plant and equipment, the valuer should seek client instructions. Where instructions are not clear the valuer should seek clarification and in respect to policy wording, a copy of the insurance policy document may need to be obtained together with definitions. The wording thereof may need to be examined to establish the correct basis and methodology for the valuation. Some of the issues to consider when reading a policy document are described below and are taken from a typical policy.

4.3 Situation

The situation is the particular location of the insured assets. It should be defined in a precise way as to where the assets are located. An owner may have many situations covered by the same insurance policy.


4.4 Property Insured

The typical policy document insures all real and personal property of every kind and description, unless specifically excluded, belonging to the insured or for which the insured is responsible or has assumed responsibility to insure.


In addition to the buildings, plant and equipment other assets may include:

external paving;
sheds, carports, etc;
lighting;
awnings;
flagpoles;
radio and television masts and antennae;
above and below ground tanks;
signage;
fire services;
water and electrical reticulation throughout site;
walls, fences and gates.

In some circumstances a property owner may self-insure some assets and these should be identified.
The property insured also extends to all such property in which the insured may acquire an insurable interest during the period of insurance. An insurable interest may result from the completion of an agreement to purchase an asset even though settlement may occur at a future time.

4.5 Typical Policy Indemnity
The typical policy provides that in the event of any physical loss, destruction or damage, which has not been specifically excluded under the policy, happening at the situation to the property insured, the insurer will indemnify the insured in accordance with the applicable basis of settlement.
The insurer will also typically indemnify the insured for the following, provided the liability of the insurer does not increase beyond the limit of liability (refer 4.13):

fees associated with the cost of rebuilding such asthose applicable to architects, surveyors, consultant engineers, legal and the like.
government fees and charges
costs and expenses incurred for the purpose of extinguishing a fire at or in the vicinity of the property insured and threatening to involve such property.
costs associated with making the property safe after a loss
costs of replacing locks, keys or safe combinations in appropriate circumstances.
costs and expenses necessarily incurred in respect of removal of debris.
damage to tools and clothing belonging to Directors and employees of the Insured whilst on the Premises.
temporary protection of undamaged property
temporary repairs
property of others for which insured is legally liable.

Modern policy wording, such as the above, has moved away from the concept of providing “blanket” cover for multiple ownerships (many situations) and requires each situation to have adequate cover. That is, each building at each location is required to be insured fully and correctly.
This implies that, for the determination of limit of liability proper allowances are made for the above fees and costs on an individual basis.

4.6 Basis of Settlement

The most common insurance policies provide for settlement on a replacement/reinstatement basis.
If the insured elects not to replace/reinstate or repair the asset then the insurer may make a payment on the basis of the indemnity value of the asset at the time of the happening of the damage, where indemnity value is, for example:

the cost necessary to replace, repair and/or rebuild the asset insured to a condition and extent substantially equal to but not better or more extensive than its condition and extent at the time that the damage occurred, taking into consideration the age, condition and remaining useful life of the asset.

The insured may elect to insure on an indemnity basis only.

4.7 Interest of Other Parties
Insurable interests of parties such as lessors, financiers, trustees, mortgagees, owners and the like which are specifically noted in the records of the insured may be included in the cover without notification or specification.
The nature and extent of such interests should be disclosed by the insured in the event of damage.
The valuer should be aware of other party interests and should act in the knowledge that liability for the valuation may extend to those other parties.

4.8 Replacement/Reinstatement

Where this is a basis for settlement then typically, the amount payable is calculated as the cost of reinstatement of the damaged asset insured at the time of its reinstatement, subject to the following provisions and subject to the defined limit of liability in the policy.

Replacement/Reinstatement is typically defined as follows:

where property is lost or destroyed: in the case of a building, the rebuilding thereof or in the case of property other than a building, the replacement thereof by similar property in either case in a condition equal to, but not better or more extensive than, its condition where new;
where property is damaged: the repair of the damage and the restoration of the damaged portion of the property to a condition substantially the same as, but not better or more extensive, than its condition when new.

The valuer should ensure that the valuation does not give rise to betterment. That is, where the assessed value is based on a more substantial or superior property than that which exists. If betterment is unavoidable, then an offsetting allowance should be made against the assessed value.

4.9 Provisions

Typical provisions are:


rebuilding, replacing or repairing must commence as soon as possible after the loss and may be carried out upon any site and in any manner subject to the liability of the insurer not being thereby increased;
in the case of a partial loss the cost of the damage cannot exceed the total sum insured;
a claim for a loss may be subject to a co-insurance clause (refer 4.12); and
no payment will be made until a sum equal to the cost of reinstatement has been incurred.

Replacement/reinstatement not only relates to assets at the situation, but also, for buildings and site improvements, requires the determination of limit of liability to be assessed at the time of its reinstatement. That is, for the insured to be adequately covered, the valuer should determine all costs associated with reinstatement/replacement of assets assuming a worst case scenario that a loss may occur on the last day of the policy period.

4.10 Extra Cost of Reinstatement

Policies for buildings and site improvements may extend to include the extra cost of reinstatement of damaged property to comply with the requirements of any Act of Parliament or regulation made thereunder or any by-law or regulation of any municipal or other statutory authority.
These would include current building and fire regulations. This extension is typically subject to the following provision:

the amount of the claim cannot include the cost of complying with a requirement which existed prior to the loss occurring and with which the insured was required to comply.

An insurance company will only insure the assets as they exist, not as they may be replaced. The reason for this is the incidence of a partial loss where repairs are made to the existing structure.
However it may not be possible to determine a reinstatement/replacement value for an existing structure because it no longer complies with current building and fire regulations or other statutory encumbrances.
Insurance companies therefore allow the insured to insure for the extra costs associated with complying with these regulations. Accordingly, the insured may wish to declare a sub-limit in respect to extra costs of reinstatement.
The valuer may determine this amount on an elemental basis by aggregating the additional elemental costs required to comply with the regulations.

4.11 Reinstatement Rights

In the event of a total loss and where as a result of the exercise of statutory powers by a regulatory authority, the reinstatement of a building as it existed prior to the loss may be prohibited or restricted. Accordingly, the insurer may pay in addition to any other amount payable on reinstatement of the building the difference between:

(a) the actual cost of reinstatement. ; and,
(b) the cost of reinstatement if it is not prohibited or restricted.

Any payment made for the difference between (a) and (b) above would be made as soon as the difference is ascertained upon completion of the rebuilding works and certified by the architect acting on behalf of the insured in the reinstatement of the building.

4.12 Co-Insurance

A standard clause in a typical policy document relating to this matter may read as follows:

In the event of damage to property insured hereunder at any Situation caused by any peril hereby insured against, the Insurer shall be liable for no greater proportion of such damage than the amount of the Insured’s declaration of value of such property on the day of the commencement of the Period of Insurance bears to the sum representing eighty five percent (85%) of the actual value of property insured at such Situation on the day of commencement of the Period of Insurance but not exceeding the Limit of Liability expressed in the Schedule.”

For this example, the insured and the insurer agree that they will share the liability of any claim according to the ratio of the declared amount and 85% of the actual value of the property insured. If the declared value is the lower amount then the clause comes into effect.
While 85% is the usual percentage applied to the calculation of the insurer’s liability, other percentages may be adopted.

4.13 Limit of Liability

When assessing sums insured for buildings and site improvements, the limit of liability is the amount representing the maximum liability of the insurer for any one loss or series of losses arising out of the one event
at any one situation. That is, the determination by a valuer of the limit of liability should be all embracing including the following:

the immediate replacement/reinstatement of value of the asset, including an allowance for preliminaries and contingencies;
extra cost of reinstatement to comply with current building and fire regulations;
cost of removal of debris;
professional fees;
statutory fees;
cost increases incurred in the policy period;
cost increases during lead-time during which demolition takes place, building plans are drafted and submitted to council for approval (assuming the loss occurs on the last day of the policy period);
cost increases during reconstruction period (assuming the loss occurs on the last day of the policy period).

4.14 Loss Situation

Insurance companies (insurers) employ skilled loss adjusters and forensic scientists when property destruction or damage occurs to adequately protect the insurers from both poorly calculated loss claims and inflated claims.
The insured may also employ its own assessor to make certain all aspects of a claim are considered by the insurer.

5.0 Replacement/Reinstatement

Cost for Buildings
In completing a replacement/reinstatement cost valuations a valuer should consider the items below and have regard to section 4 above.

5.1 Elemental Costs

For buildings, the determination of the current reinstatement
/replacement value may require establishing the elemental cost of construction of the various structural components.
Building plans and specifications should be obtained whenever possible to assist in the accuracy of the determination.

Recent constructions of a similar nature assist the valuer to determine the appropriate cost for each part of the construction process. The valuer should consider the evidence available and assess the information in terms of comparability to the subject site and form an opinion as to the appropriate cost to adopt for each particular element of construction.

Alternatively or as a check method the valuer may refer to building cost guides for any variation against indicative ranges. If there were a variation then the valuer would be alerted to establishing reasons for the justification of the valuation adopted.

A further check can be made by having regard to the percentage of each element against total cost and comparing this to industry standards. Again, any marked variation would require reasoned, researched explanations.

In certain circumstances it may be appropriate for the valuer to forego this part of the valuation in lieu of establishing an average rate per square metre for the total construction.

Valuations undertaken in non-metropolitan and remote areas would usually reflect regional costs associated with labour and materials.The location factor can be assessed by investigating local construction costs and/or by examining a sample of costs and relating them to known cost centres.

Unless specifically excluded, all property assets are required to be included in the determination of insurable value. These may include:

building shells and services;
fixtures;
walls;
gates;
fences;
paving;
awnings;
external signs and lighting;
flagpoles;
radio and television masts and antennae;
other structural improvements including sheds; carports, etc;
underground tanks;
services and connections including supply mains and meters.

5.2 Building Rates

A valuer may provide a client an estimate of insurable value based on rates published in building cost guides, but care should be taken in their application. The estimate will provide a modern equivalent cost and not necessarily the cost to replace the existing structure. Such rates are intended to provide broad estimates.
The Member should have regard to variations such as:

specific materials used in the building (eg mixture of stone, brick, plasterboard, etc);
location factors (i.e. non metropolitan sites);
design of building, including soil type, special footings, etc;
extra cost of reinstatement to comply with current building and fire regulations;
recovery of value for materials in a demolition;
external dimensions of a building (rates per square metre published by some cost guides relate only to internal building measurements);
all fees associated with reconstruction including architects, survey and engineering fees.

5.3 Fees and Contingencies

The valuer should assess in each case the extent of involvement of professionals such as architects, surveyors, consultant engineers and the like, and needs to continually research the prevailing level of fees relating thereto, as they can fluctuate considerably between high and low demand periods.

5.4 Lead Time

This is the period of time after a loss occurs when remaining improvements are demolished, plans and specifications of the replacement building are drafted and agreed upon, appropriate approvals are sought and obtained from local government authorities and all matters are completed in preparation for rebuilding.
The valuer’s assessment of this period should have regard to industry experience and continual research into the time required to complete each of these tasks including process and approval times for local government.
For buildings and site improvements, cost increases during this period need to be calculated and added to the determination of the total sum insured.
For plant and equipment the unpredictability of future cost inflation, especially that caused by foreign exchange fluctuations, generally precludes an allowance to be made under this heading.

5.5 Reconstruction Period

This is the period from the time building approvals have been obtained to completion and hand-over of the new facility.
Cost increases should to be added to the total sum insured but only to the extent that the building is completed in various stages.
The valuer should consider each element of construction to determine what allowance for cost increases should reasonably be made.
As noted above, for plant and equipment the unpredictability of future cost inflation, especially that caused by foreign exchange fluctuations, mostly precludes an allowance to be made under this heading.

5.6 Demolition & Removal of Debris

The amount determined under this heading is calculated by having regard to demolition and removal costs of similar construction in the locality of the situation. The valuer should allow for the amount able to be recovered by the demolition contractor for the building materials.
Further consideration should be given to the presence of known asbestos within a building, difficulty in gaining access to a site, the hazardous nature or otherwise of the debris after a major loss on the basis of total destruction of the site. The valuer should assume that all assets would be destroyed in a loss situation and would require removal prior to reinstatement.

5.7 Limit of Liability

As described in the policy, this is the amount representing the maximum liability of the insurer for any one loss or series of losses arising out of the one event at any one situation. It should therefore encompass the total cost of replacement/reinstatement from the time the policy commences up to the time replacement/reinstatement takes place after a loss.
In the worst case scenario a loss could occur on the last day of the policy period. If this was so, the insured would expect that there is sufficient cover to include all the likely costs not only associated with reconstruction but also in respect to making the property safe and secure, protecting undamaged property and the like.

6.0 Indemnity Value Assessment

6.1 Buildings


The indemnity value assessment should take into consideration the age, condition and remaining useful life of the asset. In the case of insurance, useful life is not synonymous with economic life, bur rather, physical life.

The insured is entitled to insure the remaining physical life of an asset, even though the economic life may have expired.
Therefore, the determination of indemnity value requires in the first instance, the assessment of replacement/reinstatement value in accordance with the methodology stated above and then an assessment to be made of the likely physical life of the asset and the life expired. The expected physical life of an asset is assessed on the basis that reasonable maintenance is carried out to preserve the existing use.
The valuer should undertake research into the expected life of assets in the location of the valuation and elsewhere as appropriate.

It is common to apply a straight-line method of depreciation when determining indemnity value, which assumes that the remaining service potential of the asset is used up at a constant rate assuming reasonable maintenance. There are however other methods including reducing balance (diminishing value).

6.2 Plant and Equipment

The indemnity value of plant and equipment is an amount equal to the cost of replacing an existing asset with an identical or substantially similar asset of comparable age, in comparable condition and of similar but not better utility together with the cost of transport, installation,
commissioning any other directly attributable costs

7.0 Heritage Assets

The principles of valuing buildings for insurance purposes either on a reinstatement/replacement or indemnity basis apply equally to determining an insurable value for a heritage building.

A building worthy of preservation as determined by relevant heritage authorities is usually because it is a good example of some aspect of heritage. Legislation in most jurisdictions may prevent renovations, modifications, additions and the like by imposing strict requirements and lengthy approval processes. However, in the case where part or the whole of the building has been destroyed along with the element of heritage to be preserved, then that heritage is lost and the owner can only ever replicate it.

The valuer should investigate the relevant legislation to confirm whether or not replication is a compulsory requirement after a loss.

The approach to the insurance valuation is the same as above. The valuer determines the elemental costs in rebuilding the structure as it exists allowing for all the “add-ons”, such as extra cost of reinstatement, fees and contingencies, and the like, to comply with policy wording.

This method establishes the current cost for repairing or replacing every component of the building in a style and form of construction most closely resembling the original.

The valuer should ensure that the engagement of suitable craftspersons, such as those skilled in stone masonry, iron tracery and stained glass, are accurately costed into the calculations.

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