If you own a commercial property, chances are you have a good understanding of what it's worth on the market. But when it comes to commercial property insurance, market value is only part of the picture.
One of the most common causes of property underinsurance is assuming a property's market value and rebuilding cost are the same. In reality, they're calculated very differently and serve different purposes.
Understanding the difference can help reduce underinsurance risk and ensure your insurance continues to reflect the true cost of replacing your property if the unexpected happens.
Why rebuilding costs continue to change
The cost of rebuilding a commercial property is influenced by far more than bricks and mortar.
"Construction materials, labour, freight, fuel prices and changes to building standards all contribute to the final cost of replacing a building." says Daniel Bullock, Managing Director at Safeguard Insurance Brokers. "Global events can affect supply chains, creating flow-on effects that influence repair and rebuilding costs here in Australia."
As those costs change, so too can the amount it would cost to rebuild your property. That's why a building sum insured that was appropriate a few years ago may no longer reflect today's rebuilding environment, even if the property itself hasn’t changed.
Market value and rebuilding cost: What’s the difference?
One of the questions we're asked most often is: What is the difference between market value and rebuilding cost for commercial property?
The answer is simpler than many people expect:
- Market value is influenced by factors such as location, land value, demand and the property's income potential.
- Rebuilding costs are based on what it would cost to demolish, clear and reconstruct the same building using current construction costs, labour, materials and building standards.
For insurance purposes, it's the rebuilding cost that matters. Your building sum insured should reflect the cost of replacing the building, not what someone might pay to purchase it.
How does commercial property underinsurance happen?
Many property owners assume commercial property underinsurance only occurs when someone intentionally chooses a lower level of cover.
In reality, it often develops gradually.
"Construction costs increase, building standards evolve, renovations or improvements are completed." Daniel says. "Over time, these changes can create a gap between the cost of rebuilding and the amount a property is insured for."
While these changes may seem small on their own, together they can significantly increase your underinsurance risk if your insurance isn't reviewed periodically.
Reducing your underinsurance risk
Reviewing your insurance doesn’t necessarily mean changing your policy every year. It does mean making sure it continues to reflect your property as circumstances change.
It may be worth speaking to your broker if you have recently:
- Completed renovations or extensions
- Upgraded major building components
- Changed the way the property is occupied
- Not reviewed your building sum insured for several years
An experienced broker, like our team at Safeguard, can discuss whether your current cover still reflects today's rebuilding costs, identify opportunities to reduce your underinsurance risk, and help ensure your commercial property insurance remains fit for purpose.
A conversation worth having
Whether you own retail premises, an office building, warehouse or industrial property, ensuring your insurance reflects your current rebuilding costs is an important part of protecting your investment.
If you’re wondering whether your commercial property is underinsured, the answer starts with understanding your property’s replacement cost rather than its sale price.
At Safeguard Insurance Brokers, we work closely with commercial property owners and commercial landlords to ensure their commercial property insurance continues to reflect their property's changing needs. If you'd like to discuss your current cover, our team is here to help.