Usually, bodies corporate rely on valuers to provide them with building replacement value. However, trustees and insurance advisors need to be aware that sometimes heritage buildings are not declared upfront – by mistake.
Recently, one of our clients – an experienced and professional managing agent client – noticed that a professional replacement cost valuation for a building managed by her seemed far too low. This art deco building was designed and built during the 1930s by a renowned architect. The building was under-valued by as much as 50%.
Any building older than 60 years is considered a heritage site or historical building and accordingly, it forms part of the national estate. It is subject to the National Heritage Resources Act 29 of 1999. This Act aims to ensure good management of the national estate and to encourage communities to conserve South Africa’s common heritage for future generations. There are many community scheme buildings in South Africa built before 1958. From an insurance point of view, we are concerned with the style of a building or buildings crafted in a way that makes it difficult to reproduce or refurbish.
Replacement cost vs. reproduction cost
When considering insurance replacement value, you take into account replacement cost – the cost to construct a structure with the same utility – as a comparable structure using today’s materials and standards. In the case of a heritage building, you consider the reproduction cost – the cost to construct an exact duplicate of the subject structure at today’s costs.
Some underwriters veer away from insuring heritage buildings as there can potentially be massive shortfalls at claims stage. This happens when there was only provision made for replacement costs but where reproduction costs would normally be far higher.
For example: Fire damage to a building requires a specific replacement cost including standard finishes. This includes perhaps a burnt ceiling, hand crafted mosaics, lead and stained glass, horsehair ceilings that will now be replaced with modern tiles, replica windows and ordinary ceilings.
The reproduction cost could cost twice as much or even more and take far longer to reinstate which will influence labour costs. Sourcing materials, finding experienced craftsmen or import the required products can potentially put the body corporate in a very difficult position.
A valuation done on a reproduction cost basis can itself be an expensive exercise as far more research into these costs will be required. Insurance advisors, managing agents and particularly trustees need to be aware of this.
In these cases, we recommend that the valuer warn the trustees when such buildings and finishes are identified. These cases should be carefully valued and clearly disclosed to the insurer so there are no disputes or problems with replacement vs reproduction costs at claims stage.
Author: Mike Addison, Addsure
Contact Addsure – The Leaders in Sectional Title Insurance – to get fit and proper advice from advisors who understand sectional title. Contact us in Johannesburg on (011) 704-3858; in Durban on (031) 459-1795 and in Cape Town on (021) 551-5069.