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Insurance and Market Valuations – What’s the difference?

Have you ever received a valuation when seeking insurance renewal terms and thought, this value seems way less than what the building is worth? There is a good reason for this common misconception. We will explain the difference between market and insurance valuations and also the basis for preparation of an insurance valuation by a suitably qualified quantity surveyor.

Market vs Insurance Valuations

The purpose of an insurance valuation (also commonly known as a replacement cost assessment) is to provide an opinion of value regarding re-construction costs in the event of total or partial property damage. Insurance premiums are based on an insurable value and this opinion of value is prepared by a suitably qualified Quantity Surveyor who provides expert advice on construction and related development costs. An insurance valuation will not tell you what your building (or your lot) is worth. This is a totally separate exercise known as a property or market valuation. This takes into account the value of the improvements on the subject property, the value of the land itself and the expected value the property realises on the open market. There are many different basis of a property valuation including; highest and best use, as-is valuations, as-if complete valuations and they can also be undertaken for many different purposes, whether that be; mortgage security, family law, resumptions, stamp duty or capital gains tax. Registered Property Valuers are the professionals who can provide you with this advice.

Insurance Valuations

Quantity Surveyors are experts in construction costs. This expertise allows them to be recognised as the most suitably qualified profession to provide advice on the insurable value of a property. Quantity Surveyors have a broad range of professional skills and must have suitable experience, knowledge and an understanding of the following to provide insurable value advice:

1. Costs for the construction or supply of assets of a similar size and utility to the subject;

2. Demand and supply of building materials and labour, professional services and planning and building approval processes which determine the timeframe for rebuilding;

3. Installation and commissioning costs and timeframes for plant and machinery insurance valuations;

4. Planning scheme provisions which could affect whether a building can be rebuilt in its present form;

5. Heritage issues;

6. Escalation of building costs;

7. The size and extent of all improvements including building structures and ancillary improvements.

Taking a new property for example, insuring a new strata titled property, or any property for that matter, is not as simple as using the construction cost. No matter the original construction cost, to be appropriately insured for an insurable event the estimate must include;

1. Building construction costs, 

2. Locality factors,

3. Additional / updated statutory requirements as at the date of preparation,

4. Professional fees (for example; Cadastral Surveyor, Architect, Structural Engineer, Civil Engineer, Hydraulics Consultant, Quantity Surveyor and Project Manager)

5. Demolition / removal of debris,

6. Application fees,

7. Cost escalation through the duration of the rebuild and during the insured period.

It is important to be appropriately insured, especially in this day and age when co-insurance clauses (averaging provisions) is typical in most policies. Co-insurance clauses provide that, if at the time of the loss, the cost to replace the asset insured exceeds the amount of cover, the insured is considered to be self-insuring for the difference in value. The Co-Insurance Clause is written into policies principally to encourage clients to make sure they have a sum insured that is adequate to obtain the maximum protection from the policy. It is important to leave this exercise to the experts!


This article was contributed by Zac Gleeson, Quantity Surveyor – Strata Compliance Solutions

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