The building sum insured is an important part of Commercial Property Insurance.

It should reflect the valuation basis required by the policy.

Is the market value of the property the right amount? #

Usually not.

The market value of a commercial property can include:

• Land value.
• Location.
• Rental yield.
• Development potential.

These factors do not necessarily reflect the cost of rebuilding the structure after a major loss.

What should the rebuilding value consider? #

Depending on the property, costs can include:

• Demolition.
• Debris removal.
• Construction.
• Professional fees.
• Council or authority requirements.
• Inflation during rebuilding.
• Escalation in construction costs.

Should I use the original purchase price? #

No.

The amount originally paid for the property may have little relationship to its current rebuilding cost.

Should a professional valuation be obtained? #

For significant commercial property, an insurance valuation can help establish an appropriate reinstatement value.

Regular valuations can be particularly useful where:

• Construction costs have increased.
• The property has been renovated.
• Extensions have been completed.
• Building use has changed.

What happens if the building is underinsured? #

Depending on the policy, an underinsurance or co-insurance provision can reduce the amount payable for a claim.

This can potentially affect partial losses as well as total losses.

Building values should therefore be reviewed regularly rather than simply carrying forward the previous year’s figure.