Sectional title valuations: How to avoid a common error when updating the insurance sums

(Updated: 12 December 2024)

One of the most common errors which occur following a professional valuation, is the duplication of escalation. This happens very easily as quantity surveyors and many valuers will present the total replacement cost with escalations included, whereas other valuers will show escalations in addition to the replacement values. Both figures are correct, however, if dealt with incorrectly, a duplication can occur, and often does.

In this article, we are rather going to explain the concepts briefly, however, set up a link below to see a comparable table of the two methods when presenting a valuation. We will also briefly the explain the difference in a short video clip. We will call the two methods simply Method A and Method B.

In both Method A and Method B, the values of the sectional title buildings and common areas are determined. The estimation demolition cost plus professional fees are then added. A sub-total of the replacement costs excluding VAT are now at hand.

Now, using Method A, pre-tender escalation as well as post-tender escalation figures are added. Value Added Tax (VAT) is then subsequently added resulting in Replacement Cost (Method A)

Method B on the other hand, uses the same subtotal of replacement costs, however, does not yet add escalations, but rather only VAT.

Escalations are thus shown as separate figures to ensure that escalations are not added again (twice) by the insurer.

Bottom line, where Method A is used, be sure to break down the figures for the insurance broker when insuring (to avoid unnecessary wasted premium) and properly show the replacement cost breakdown when preparing the schedule of replacement values (SRV).

Explanation of pre-tender and post-tender escalation

Pre-tender escalation refers to the increase in building costs that occurs during the period before the tender process begins. It accounts for inflation and market conditions from the time the insured value (replacement cost) was calculated until the point when tenders are called for construction.

In relation to insurance – this cost increase is often aligned with the escalation during the period of redesign, as delays in planning and approvals after a loss can cause the building costs to rise before reconstruction commences.

Post-tender escalation refers to the increase in costs that occur after the tender has been awarded and during the actual reconstruction process.

It can arise due to inflation, shortages of materials, labour cost increases, or unforeseen cost related circumstances during the construction phase.

In relation to insurance – this post-tender escalation aligns with escalation during reconstruction, as it covers cost fluctuations that occur after the redesign phase but before the reinstatement is complete.

Escalation during the insurance period

This is the inflationary adjustment applied to the sums insured for the duration of the policy term (typically one year). It is not related to the replacement value per se but ensures that the sums insured keep pace with general inflation during the insurance year to avoid underinsurance.

Key differences

Period of Insurance Escalation reflects the inflation adjustment during the insurance year.

Pre- and post-tender escalation reflects cost increases specific to the actual reinstatement timeline.

How these concepts interrelate

 (pre-tender and post-tender escalation with redesign and reconstruction)

The pre-tender phase overlaps with the period of redesign, as both cover delays before construction begins. Post-tender escalation corresponds to cost increases during the reconstruction phase.

Escalation during insurance period

This is distinct and does not contribute to the sums insured related to replacement values.

Its purpose is to buffer against the risk of inflation eroding the adequacy of coverage during the insurance term.

Practical insurance implications

Pre- and post-tender escalation should be anticipated and included in replacement cost estimates and policy extensions where applicable.

Escalation during the insurance period acts as a safety net to keep sums insured relevant but does not cover actual reconstruction cost variances.

In conclusion

Simply determine or identify which of these methods have been presented, and bear in mind when preparing the schedule of replacement values and instructing your broker. Preferably provide your insurance advisor with the actual valuation document so that this can be properly attended to by them.