Replacement cost refers to the cost of constructing a building or making other improvements to an existing structure which has the same utility, but using modern design, workmanship and materials.
The following can serve as an example: The replacement cost of constructing a building can be determined by adding the labour and material costs, architects and other professional fees. This cost method is often the only reliable approach when dealing with the replacement of structures in the insurance industry. Our highly qualified Quantity Surveyors are all registered at the South African council for the Quantity Surveying Profession.
When valuing a building's replacement cost, we aim to determine the expense required to rebuild or repair the structure to its original utility using modern materials, design, and workmanship. This valuation ensures that property owners are adequately insured and protected against unforeseen losses.
The principle of average is a critical concept in insurance and building valuations. It applies when the insured value of a property is less than its actual replacement cost. In such cases, the insurer reduces the claim payout proportionally to the degree of underinsurance.
If a building is insured for R1,000,000 but its actual replacement cost is R2,000,000, and it suffers a loss of R500,000, the insurer will only cover R250,000. This is calculated as:
Claim Payout = (Insured Value / Actual Value) × Loss Amount - Excess Amount
Why Accurate Valuation Matters: Accurate replacement cost valuation prevents underinsurance and ensures that property owners receive adequate compensation in the event of a loss. Regular updates to the insured value are essential to account for changes in construction costs and market conditions.