One of the key features of the Reinstatement Value Condition is that one needs to have actually incurred expenditure in reinstatement. This condition goes on to state that in the event of the property being damaged, the basis upon which the amount payable is to be calculated will be the cost of replacing or reinstating on the same site property of the same kind or type but not superior to or more extensive than the insured property was when new, subject to the provisos detailed in the policy wording.
Escalation and Inflation values are very important when considering the value at risk and how one determines what level of cover is or should be in place.
Example: The period of insurance is 12 months with effect from 01 May (say 2022) until 30 April 2023. Assume the total insured amount is R 10 000 000.00
This is the insured amount provided for the insurance period. But, during this period one must remember that Escalation and Inflation must also be taken into consideration.
So, let’s assume a loss is suffered on the 01 December 2022, there has been escalation during the period.
1. Since the policy must be adequate at the time of any claim, the sum insured must be projected to day 365, minimum. What is the anticipated building inflation rate for the next 12 months? Let’s say 10%. Adding 10% to the insured amount means the sum insured for day 365 must therefore be R 11 000 000.00
2. Over and above this, how long will it take to rebuild the building, 6, 9, or 12 months? With the building industry hard pressed it is more reasonable to assume 12 months. (Remember: the policy allows Reinstatement Value Conditions with the resultant Average condition applying.)
3. Let’s say it will take 12 months to rebuild the building following a total loss or near total loss. Day 720- add another 10% (compounded) to R 11 000 000, and now the sum insured must be R 12 100 000.00
Escalation extends the policy to include cover during the current period of insurance in order to ensure that the value of the property is increased during the course of the period to avoid under insurance in the event of a claim. Inflation is in retrospect for reinstatement thereafter.
By not factoring this in, Average will apply and one is normally left with a tremendous shortfall. For more information contact us at 011 455 5101.