The improvements on a property are usually insured against unfortunate events such as fire and “acts of God”. The improvements to the property need to be fully insured for full replacement cost, as most insurance policies include an average clause.
The average clause is applied when the amount insured is less than the replacement cost.
This average clause states something to the effect that if there is total destruction of the improvements then only the sum insured will be paid out. Should there be partial destruction to the property, a percentage of the replacement cost will be paid out. This percentage is calculated by dividing the actual replacement cost by the sum insured and the result is the percentage of the claim that will be paid.
So for example, the improvements to a property total R 1 000 000 and the property is insured for R 750 000, the amount paid out for the claim will be 75% of the repairs.
As you can see it is important to insure the property for the full replacement cost. A point to consider here is that most insurance will cover replacement and not replication. So if you are insuring a house with, for example, hand carved banisters, pressed steel ceilings and solid timber floors, the insurance policy will not cover these items. It is always best to discuss these matters with your insurance company to clarify exactly what is covered.
When the valuer is valuing the replacement cost of a property, the valuer will determine the size of the improvements, usually from the plans or by physically measuring the improvements. Once the improvements are quantified, the valuer determines a replacement cost per item and totals the amount. To this amount the valuer will add amounts for site clearance, professional fees, municipal fees etc.
This final amount is the full replacement cost of the improvements or the insurance value of the property.