VALUATIONS – ANZ NOTE
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.
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
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
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
International Valuation Standards
guidance note is intended to be consistent with the publication
“International Valuation Standards 2005” as issued by the
International Valuation Standards Committee.
there may be departures from IVSC Standards to reflect Australian law
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:
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.
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.
Instructions from Client
instructions to members to undertake valuations for insurance
purposes should be confirmed in writing by the client.
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.
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:
replacement/reinstatement with new value and/or indemnity value as at
the date required;
extra necessary costs, if any, to comply with current building and
cost of demolition and removal of building debris.
cost increases during
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.
allowance for cost increases during rebuild period.
estimated limit of
statement as to the treatment of GST.
statement of specific valuation exclusions such as plant, equipment,
tools, furniture and the like.
full description of assets.
extent of betterment,
if any, should the replacement asset be better or more extensive than
its condition when new.
change impacting on land value caused by loss
the improvements should be noted.
loss of rent may be required as a separate request to the insurance
Plant & Equipment
plant and equipment assets, report content should clearly state or
explain the following:
reinstatement/replacement with new value and/or indemnity value as at
the date required.
foreign exchange rates prevailing at the date of valuation for
equipment manufactured overseas.
treatment of obsolete assets.
treatment of cost inflation.
treatment of the cost of money during the replacement process.
treatment of debris removal costs.
treatment of GST.
extent of betterment, if any.
such as landlord’s fixtures and fittings, stocks and materials in
trade, and the like.
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
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
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
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.
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.
addition to the buildings, plant and equipment other assets may
sheds, carports, etc;
radio and television
masts and antennae;
above and below
water and electrical
reticulation throughout site;
walls, fences and
some circumstances a property owner may self-insure some assets and
these should be identified.
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
Typical Policy Indemnity
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.
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):
associated with the cost of rebuilding such asthose applicable to
architects, surveyors, consultant engineers, legal and the like.
government fees and
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
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.
of undamaged property
property of others
for which insured is legally liable.
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
implies that, for the determination of limit of liability proper
allowances are made for the above fees and costs on an individual
Basis of Settlement
most common insurance policies provide for settlement on a
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:
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.
insured may elect to insure on an indemnity basis only.
Interest of Other Parties
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.
nature and extent of such interests should be disclosed by the
insured in the event of damage.
valuer should be aware of other party interests and should act in the
knowledge that liability for the valuation may extend to those other
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.
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.
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.
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;
the case of a partial loss the cost of the damage cannot exceed the
total sum insured;
claim for a loss may be subject to a co-insurance clause (refer
payment will be made until a sum equal to the cost of reinstatement
has been incurred.
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.
Extra Cost of Reinstatement
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
would include current building and fire regulations. This extension
is typically subject to the following provision:
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.
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.
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.
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
valuer may determine this amount on an elemental basis by aggregating
the additional elemental costs required to comply with the
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
the actual cost of reinstatement. ; and,
the cost of reinstatement if it is not prohibited or restricted.
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.
standard clause in a typical policy document relating to this matter
may read as follows:
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.”
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.
85% is the usual percentage applied to the calculation of the
insurer’s liability, other percentages may be adopted.
Limit of Liability
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
any one situation. That is, the determination by a valuer of the
limit of liability should be all embracing including the following:
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
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).
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
insured may also employ its own assessor to make certain all aspects
of a claim are considered by the insurer.
completing a replacement/reinstatement cost valuations a valuer
should consider the items below and have regard to section 4 above.
buildings, the determination of the current reinstatement
value may require establishing the elemental cost of construction of
the various structural components.
plans and specifications should be obtained whenever possible to
assist in the accuracy of the determination.
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
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.
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
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.
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
specifically excluded, all property assets are required to be
included in the determination of insurable value. These may include:
building shells and
external signs and
radio and television
masts and antennae;
improvements including sheds; carports, etc;
connections including supply mains and meters.
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.
Member should have regard to variations such as:
used in the building (eg mixture of stone, brick, plasterboard, etc);
(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;
of a building (rates per square metre published by some cost guides
relate only to internal building measurements);
fees associated with reconstruction including architects, survey and
Fees and Contingencies
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.
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.
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
buildings and site improvements, cost increases during this period
need to be calculated and added to the determination of the total sum
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.
is the period from the time building approvals have been obtained to
completion and hand-over of the new facility.
increases should to be added to the total sum insured but only to the
extent that the building is completed in various stages.
valuer should consider each element of construction to determine what
allowance for cost increases should reasonably be made.
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
Demolition & Removal of Debris
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
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.
Limit of Liability
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
place after a loss.
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.
Indemnity Value Assessment
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.
insured is entitled to insure the remaining physical life of an
asset, even though the economic life may have expired.
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.
valuer should undertake research into the expected life of assets in
the location of the valuation and elsewhere as appropriate.
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).
Plant and Equipment
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,
any other directly attributable costs
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.
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
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.
valuer should investigate the relevant legislation to confirm whether
or not replication is a compulsory requirement after a loss.
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
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.
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.