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Here at Charterfields, we’ve been providing global organisations with expert, independent valuations for insurance purposes for over three decades. During this time, we’ve assessed reinstatement costs for property and equipment across a huge range of sectors from the agriculture industry to steel mills, power plants, airports, hotels and hospitals. All of which present their own unique challenges.

However, certain commonalities are consistent across industries when it comes to ensuring accurate declared values. As such, we’ve enlisted our expert team of surveyors to answer some common questions our clients ask to help you get the most out of your reinstatement cost assessment, whatever the nature of your business. 

1. What does ‘reinstatement cost’ mean?

In the UK, most commercial property damage insurance policies are written on a reinstatement basis.

In these property damage insurance policies, “Reinstatement” is typically defined as:

  • Replacement: Where an insurable property or asset is lost or destroyed, its replacement to a condition equal to, but not better or more extensive than, its condition when new.
  • Repair or Restoration: For property that is partially damaged, reinstatement means the repair of the damage and/or the restoration of the damaged portion of the insurable property to a condition substantially the same as, but not better or more extensive than, its condition when new.

You may see the term ‘Day One Reinstatement’ being used. This reflects the cost to replace or reinstate the property or assets on a ‘new for old’ basis as at the start (Day One) of the insurance policy.

2. What is a reinstatement cost assessment?

A reinstatement cost assessment (RCA), also known as an insurance valuation, is an independent valuation that typically involves visiting a facility to document and assess the estimated reinstatement cost of the property and/or contents. RCAs are typically conducted by qualified and experienced chartered surveyors, such as Charterfields, with many insurance policies now requiring that regular RCAs should be conducted by members of the Royal Institution of Chartered Surveyors (RICS).

Reinstatement cost assessments estimate the cost to rebuild a property after damage, covering everything from sourcing the right materials to labour costs and professional fees.

The reinstatement cost includes all current construction costs, complying with updated building codes and regulations, and accounts for site-specific requirements, such as foundation work, civil and external structures, professional services, and the cost of demolition and debris removal. 

When it comes to machinery, plant, and equipment, the cost reflects acquiring similar assets, including dedicated civil works, service connections, transport, installation, commissioning, as well as the cost of demolition and debris removal and professional fees, as applicable.

These assessments are essential in securing appropriate insurance coverage. Underestimating reinstatement costs can be particularly devastating for businesses in the event of a total rebuild or costly repair, as you may only be entitled to a part-payment of the overall reinstatement cost.

3. Why should I have an insurance valuation of my assets?

Owners of property and equipment assets should have a regular insurance valuation of their assets for several reasons:

  • Accurate Coverage: An insurance valuation ensures that the assets are adequately covered by insurance in case of damage or loss. Without an accurate valuation, there’s a risk of underinsurance, where the coverage amount may not be enough to replace the assets in the event of a claim.
  • Risk Management: Property and equipment often represent a significant portion of a company’s assets. An insurance valuation helps in assessing the potential financial impact of asset loss or damage, aiding in risk management strategies. It allows businesses to identify areas where additional coverage or risk mitigation measures may be necessary.
  • Compliance: Some industries, lenders or regulatory bodies may require businesses to have appropriate insurance coverage for their assets. An insurance valuation helps ensure compliance with such requirements by providing independent documentation of the replacement cost of assets.
  • Cost Savings: Accurate insurance valuations can prevent overpayment of insurance premiums. By knowing the true appropriate declared value of their assets, clients can ensure that insurers have confidence in the information provided on the risks, enabling many insurers to offer more competitive rates, potentially saving money in the long term.
  • Claims Processing: In the unfortunate event of damage or loss to assets, an insurance valuation can serve as crucial support for the losses claimed. It can also assist insurers internally with support documentation for processing insurance claims efficiently. It provides an independent basis for determining the replacement cost or the amount of compensation to be paid by the insurance company
  • Asset Management: Regular insurance valuations can also be part of an overall asset management strategy. It helps in tracking the location and replacement cost of assets over time, assisting in the planning for upgrades or replacements as needed.

Insurers may require reinstatement cost assessments, as a condition of providing coverage, for complex risks legal compliance purposes for listed properties, such as heritage buildings, or those residential properties that are worth more than £600,000, or higher risk locations such as airports, manufacturing facilities and power plants.

4. Who is responsible for a reinstatement cost assessment?

The setting of declared values is the responsibility of the insured. Some insurance brokers and even insurers may offer opinions on values or approaches to setting values but ultimately it is the insured’s responsibility to set the correct coverage.

When it comes to insurance valuations for commercial properties, the responsibility for arranging a reinstatement cost assessment may fall to the building management company, the tenant or the property owner, depending on the lease terms. 

5. What is the difference between a reinstatement cost assessment and a market valuation?

Market value refers to the value of a property in the open market, i.e. what a purchaser would pay for the asset as it is, and reflects factors such as age, condition, interest rates, location, income potential and market demand.

On the other hand, reinstatement cost assessments consider the costs of rebuilding or replacing the assets as at the assessment date, with an identical or near identical new asset based on current construction and supply costs. 

This can be very different to the ‘worth’ of an asset in the open market. For example, a historic listed textile mill building in the north-west of England could cost £30m to replace but could have a market value of less than £2m. Conversely, a modern apartment complex in Central London could have a market value several times the rebuild costs for the building.

Find out more about the factors that influence reinstatement costs here.

6. Are contents typically included in insurance valuations?

Property damage insurance policies may cover just the building or the building and contents.

Fixed building services items, like heating and ventilation systems or lifts, are usually included in an assessment of the buildings. Specialist insurance valuation surveyors follow guidelines issued by the Royal Institution of Chartered Surveyors on the appropriate demarcation between buildings and contents. However, it should be noted that the demarcation used by property valuers and other professionals may differ from the definitions included in your insurance policy, so care is required on this point.

Items such as vehicles and IT equipment may be covered under separate insurance policies so the appropriate treatment of these assets may require investigation.

7. How often should I update declared values?

Regularly scheduled assessments are essential to ensure accurate declared values, minimising the risk of underinsurance. RICS guidelines, as determined after discussions with insurers, suggest that declared values are adjusted annually to reflect the rate of inflation, with a major review every three years. A reinstatement cost assessment should be conducted earlier if significant alterations have been made to the property or assets.

In times of higher inflation, or significant changes to individual locations, we recommend that figures are reviewed on an annual basis. This ensures that inflation and economic factors are accounted for. Regular assessments, particularly following renovations or expansions, ensure that values remain accurate.

8. Why is it important to update declared values regularly?

Our research reveals that over 70% of properties are undervalued, with approximately 40% being insured at less than half of their true reinstatement cost. This indicates that some companies are not reviewing values often enough.

  • Underinsurance: When a property’s declared value is significantly below its actual reinstatement cost, insurers may apply the “average clause,” resulting in proportionate payouts for claims. For example, if a building with a declared value of £10 million incurs £300,000 in damages but is found to have a true reinstatement cost of £15 million, the insurer would pay only 10/15ths (i.e. £200,000) of the claim, leaving the policyholder liable for the remainder.
  • Over insurance: Conversely, when a property is insured above its reinstatement cost, premiums are unnecessarily high without providing additional benefit. This can lead to wasted funds for the policyholder.

Inadequate declared values can result in unforeseen out-of-pocket expenses, as well as potential legal implications for directors, if deemed negligent. Here are seven ways to get your declared values correct.

9. Is an independent assessment necessary despite annual indexing?

While annual indexing helps keep declared values aligned with inflation, it may not account for the true pace of inflation or location-specific factors. 

Indices can be a useful benchmarking tool, but they are always based on averages so are unlikely to reflect a policyholder’s specific assets, particularly if these are specialised. 

Indices can also be subject to regular rebasing or even revision. Accordingly, using indices over long periods to update declared values can leave a policyholder exposed. 

Independent assessments every few years offer a more reliable way to ensure that declared values remain accurate.

Want to learn more about the indices available and how dependable they are? Download our recent whitepaper on using indices to estimate reinstatement costs for insurance here. 

Get in touch to see if your declared values are correct

Whether you’re a risk manager, insurance broker, reinsurer or stakeholder in your organisation, we aim to provide an accurate understanding of your assets, so you can make informed decisions that reduce the risk of under- or over-insurance. Get in touch with the team at Charterfields for an exploratory conversation or to arrange your next reinstatement cost assessment. 

We’ll be sharing more of your frequently asked questions spanning the entire insurance valuation lifecycle. Follow us on LinkedIn to be the first to read our next instalment of this series discussing valuation methods, where we’ll share insider information on what happens during a reinstatement cost assessment.