How property valuations affect insurance coverage

Property valuations are important to ensure comprehensive insurance coverage, but not many consumers know this. It is also not a good idea to only depend on the municipal valuation and you must actually use the replacement value of your home when insuring it.

Municipalities review rates, taxes and valuations annually and property owners often find themselves at the crossroads of financial decisions. The municipal valuation, aimed at gauging a property’s market value, remains distinct from its expected replacement value, Peter Olyott, CEO of financial services provider, Indwe Risk Services, says.

Despite escalating municipal valuations, it is essential to recognise that these figures might still fall short of accurate insurance valuations based on current replacement costs.

“The municipal valuation, determined by intricate formulas set by the Valuations Policy and the Local Government: Municipal Property Rates Act, might not precisely mirror market value. Acknowledging this legal requirement, property owners are encouraged to assess their properties against replacement values, factoring in elements such as construction costs, professional fees, demolition expenses and upgraded regulatory compliance,” he says.

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How underinsurance of your home affects you

Olyott uses the example of a building erected two decades ago at a cost of R600 000, that can be sold today for R6 million. “Beyond construction costs, the inclusion of professional fees, demolition expenses and regulatory upgrades could elevate rebuilding expenses from R6 900 000 to R8 280 000. The sum insured in this example could be R4 000 000 (or less) which is more than 50% underinsured.

“The potential consequences of outdated replacement value sums insured become evident in the face of loss. Imagine storm damage that will cost R100 000 to repair. With an updated replacement value sum insured of R8 280 000, insurers would contribute a mere R48 300 to cover the loss. Conversely, if the owner relied on a R5 500 000 municipal valuation, insurers could have paid R66 425 of the loss, leaving the insured responsible for R33 575.”

This example shows how important it is to ensure that you do not end up paying for damage to your home out of your own pocket. If you are unsure of how to get the replacement value of your house, Olyott suggests using online tools to estimate building costs.

“These platforms consider factors such as property classification, location and bespoke elements. If you cannot use one of these tolls, you can consult a quantity surveyor who will be able to provide an accurate reflection of replacement value.”

Olyott says underestimating insurance coverage by 50% could lead to substantial shortfalls. “For instance, a hypothetical property owner saving R6 000 per year on insurance premiums could accumulate R100 000 over a decade, while the true rebuilding cost grow to R14 175 000. A loss of R500 000 could result in a shortfall of R167 900, excluding the R100 000 in savings.”

He reminds property owners that being adequately insured is not just a financial decision but a safeguard against potential financial devastation.