CONCEPT OF ESCALATION IN SUM INSURED
The 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 insured property when new . In calculating the reinstatement value , it is assumed that total destruction could occur on the last day of validity of the insurance policy ( i . e . on day 365 ). Accordingly , building cost fluctuations form an integral part of the sum insured .
Prior to computing cost fluctuations during the period of insurance , the valuation must , in the first instance , provide for the total replacement cost applicable at the start of the insurance period in order to accommodate possible loss at that time . The cost comprises the current replacement cost
( inclusive of demolition costs and all fees as will be required ) at the commencement of the insurance period plus escalation allowances during all stages of the reinstatement .
The first stage ( pre-reinstatement stage ) relates to the period between the damage occurring and the commencement of the reinstatement work . In this instance , industry-based indices are usually applied . Currently , indices provided in the Building Cost Report published by the Bureau for Economic Research ( BER ) are accepted as an industry practice for the building sector .
The timeline starts from the date of loss up to the decision to proceed with the reinstatement and must account for the insurance assessment period , demolition of existing structures , preparation of new drawings and tender documentation , local
SA Real Estate Investor Magazine SEPTEMBER 2022 105