Did you know that many bodies corporate lose money on insurance premiums by skimping on the valuation?
In some cases, the reason might be that the body corporate has not met its obligation to obtain the mandatory 3-yearly replacement cost valuation- this usually leads to over-escalating the sum insured by applying the same “on-the-safe-side” escalation rate of 10% year after year. A professional insurance valuation would remedy this effect and save the body corporate more money than what it costs.
Another common cause of over-insurance is that trustees tend to settle for the cheapest valuation provider. By saving the body corporate perhaps R500 every 3 years, they are most likely losing the body corporate the same amount every month due to an inflated insurance premium- just because the trustees appointed the valuer on the basis of cost over merit.
Two vital aspects in the field of insurance valuations are that the property valuer must be experienced in sectional title insurance valuations, and that he must be backed by sufficient professional indemnity cover to match the size of the buildings or complexes valued by him. Only a handful of property valuers in South Africa are truly specialised and experienced in sectional title valuations for insurance purposes, and only a small portion of these valuers possess the confidence to provide a replacement cost assessment that is neither too low, nor too high.
Professional indemnity is a form of liability insurance that covers a tradesman’s legal expenses in the event of a negligence claim lodged against him, including the claim amount awarded against him after due process. Having adequate professional indemnity cover affords a valuer the confidence not to have to err on the safe side by inflating his valuations.
In converse, a valuer with sufficient professional indemnity insurance affords trustees the peace of mind of having an avenue of recourse in the event of a shortfall in claim payout due to negligence on the part of the valuer. Valuers that are under-qualified and under-insured tend to over-estimate a building’s replacement cost to avoid any recourse being taken against them.
Only looking at cost is risky
The potential savings on an insurance premium often outweigh the cost of an insurance valuation. If your scheme has been increasing its replacement value by 10% every year, it is quite possible that you’re currently over-insured. With a default escalation rate of 10 - 15%, your scheme can easily find itself over-insured by up to 30% after only three years!
Our advice: don’t avoid the insurance valuation just because you are concerned about the cost!
Worry about unqualified valuers
While it is recognised that cost plays a major role in deciding which valuer to appoint, it is far more critical to ensure that you are working with a professional who will perform a thorough valuation and can protect the body corporate and the trustees in case anything goes wrong.
If the quoted valuation fees fall within the budgeted cost, we encourage trustees to rather identify the most reputable valuer in terms of experience, qualification and professional liability. These factors can potentially have a far bigger impact on the scheme than the price of the insurance valuation.
How do you know if your valuer is qualified? In a previous blog article, we put together a checklist that will help you identify an unqualified valuer or a poorly conducted valuation.
Valuers who are not suitably qualified or experienced may not be confident enough to present an accurate valuation. They could be tempted to inflate the replacement value in order to safeguard themselves at your expense, resulting in your body corporate paying a higher insurance premium.
On the flip side, trustees should also be aware that they can be held legally liable for an averaged or refuted claim from being under-insured due to an inexperienced valuer.
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Obtaining a professional insurance valuation for your scheme every three years will help to avoid over-insurance. There is no added benefit of an overstated replacement value, as it only results in needless and wasteful expenditure.
If you don’t know how to identify the most suitable valuer, follow your managing agent’s recommendation, or ask the valuer these 3 questions:
1. How much professional indemnity cover does he hold? (Benchmark: 10% of the building’s replacement value, but minimum R20 million)
2. How many community schemes has he valued in the past 30 days? (Benchmark: at least 50 – 100 complexes per month)
3. Does his fee include a free annual valuation update during the 3-year valuation cycle? (Benchmark: yes!)