For many bodies corporate, this time of year signals AGM season. As managing agents set up annual general meetings (AGM) with trustees and other body corporate members, it is important that all the required documents and figures are ready for this important gathering.
Replacement cost determines updated insurance value
One of the agenda items that needs to be addressed at the AGM is updating the replacement cost of the building. This is the value that will determine the total insured value of the building; therefore, the insurance premium payable monthly by the body corporate.
The Sectional Titles Schemes Management Act requires that a professional and independent valuation is completed for the building every three years, and this needs to be presented at the AGM. Through this Act, the trustees are obliged to ensure that the insurance value is always up to date so that the building enjoys sustained and comprehensive insurance cover. If trustees fail in this duty, they can be held personally liable in case the body corporate is found to be under-insured in the event of a claim.
Annual insurance adjustments
For the years in between the valuation, insurers often apply a default annual increase of 10-15% which is seldom realistic.
If an annual increase is applied year after year, your buildings may end up over-insured to the point of wasting money on inflated insurance premiums. If no annual increase is applied and the replacement value of the building remains the same year on year, the body corporate may find itself in the dangerous position of being under-insured.
Is your valuer unbiased?
This is yet another reason to use a third-party valuer who has no vested interested in decreasing or increasing the insurance value.
We are often asked if the trustees can appoint a quantity surveyor (QS) to advise on the building costs. Like with any good valuer, the QS report must meet the minimum requirements of an insurance valuation, showing a detailed breakdown of the replacement cost as well as a schedule of replacement values per each unit or section. Most importantly, the appointed service provider must carry sufficient professional indemnity insurance to match the size of the building or complex to be valued. This should preferably be at least 10% of the assessed replacement value but no less than R10 million.
Note that building costs are not the same as replacement costs – which is the total cost involved in assessing, redesigning, clearing the site, constructing a new building as well as all the management and engineering costs involved in such a project. True replacement value includes costs for submitting plans, demolition costs, professional costs (architects, engineers, project management, etc.), removal costs, plumbing, electricians, VAT and much more.
Insurance valuation updates – free for Mirfin’s clients!
Mirfin’s insurance valuations are backed by professional indemnity cover to the value of R45 million and we offer a FREE annual valuation update for all our current clients until the next valuation is due after the 3-year cycle.
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