(Blog post updated on 18 November 2024)
Why escalation and inflation extensions are vital for building insurance
When insuring your property, it’s essential to include escalation and inflation extensions to your policy. These extensions help ensure your property is adequately insured throughout the insurance period and during reconstruction if a claim arises. Let’s break it down.
What is replacement value?
Your property is insured based on its replacement value – the cost to rebuild it from scratch, including materials, labour, professional fees, demolition costs and VAT. However, replacement costs don’t stay static. Prices for materials like bricks or cement increase over time due to inflation, making the initial value set at the start of your policy insufficient by the time a claim occurs.
Escalation
Escalation covers increases in costs during your current insurance period. For instance, if the cost of a bag of cement rises from R10 to R11 over the year of insurance, escalation ensures this increase is accounted for. If a claim occurs toward the end of the policy year, the escalation extension ensures you are not underinsured due to inflation during that year.
Many insurers now include this cover automatically. However, it’s vital to confirm the percentage increase specified in your policy and ensure it aligns with potential cost increases in your region or for your property type. The schemes official valuation should more accurately, set this out.
Inflation
Inflation, (the word used in different context here) on the other hand, addresses cost increases during the reconstruction and redesign period after a loss has occurred. If your building suffers a total loss, reconstruction could take 12 to 18 months or longer. During this time, costs for materials and labour may continue to rise. Inflation cover ensures your policy accounts for these future increases, even after the policy period has ended.
Avoiding common pitfalls
- Over insurance: Some valuers include escalation and inflation provisions in their initial replacement values, resulting in double coverage if these extensions are also added to the policy. Always clarify with your valuer and insurance broker to avoid paying unnecessary duplication of premium.
- Inadequate cover: Conversely, failing to include sufficient escalation or inflation cover can leave you underinsured, particularly if reconstruction periods are lengthy or inflation rates spike unexpectedly.
Why work with a specialist broker?
Understanding these nuances is critical, particularly in the community schemes market where properties often involve multiple stakeholders and complex valuations. An experienced broker ensures your policy includes the right extensions and adequate coverage for all scenarios. Thousands of rands of premiums can be saved by simply getting this part right.
Author: Mike Addison
Addsure is a leading sectional title insurance broker. Get fit and proper advice from advisors who understand sectional title.