INSURING FOR FULL REINSTATEMENT VALUE
The primary objective of property owners is to ensure their buildings and related infrastructure are adequately insured . Accordingly , the sum insured should be based on a replacement ( reinstatement ) cost valuation that represents the total cost that will be incurred in the event of damage to the extent requiring complete demolition and reconstruction of the fixed improvements .
Reinstatement value is based on the principle that following a loss the amount payable by the insurer shall be the cost of replacing or reinstating the same kind or type of building . The reinstatement value does not relate to market or investment value derived on the basis of potential rental nor any other form of value . Furthermore , it does not include the value of the land . In summary , in deriving an insurance value of fixed improvements the purpose is to provide an estimate of likely costs that may be incurred in total replacement of such fixed improvements arising out of an insurable disaster .
“ In determining the claim value to be paid , the calculation applied is the Sum Insured ( SI ) divided by the Value at Risk ( VAR ) and the quotient then multiplied by the Repair Estimate ( RE )”
SA Real Estate Investor Magazine SEPTEMBER 2022 101