How to Work Out the Sum Insured on a Commercial Building

It is the cost to rebuild, not what the building is worth

This is the most common mistake we see, and an easy one to make. Market value, rateable value and the price you paid are all different numbers from the cost of rebuilding, and none of them belongs on your policy.

Market value includes the land, and land does not burn down. In some parts of the country a building can be worth considerably less than it costs to replace - an older provincial industrial unit is a good example. Insure it for what it would sell for and you have insured a fraction of the rebuild.

The rateable value is a council valuation for setting rates. It is not a construction estimate and was never meant to be used as one.

What has to be in the number

A rebuild is not just the building. Before anyone can start, the damaged structure has to come down and the site has to be cleared, and both cost money. Demolition and debris removal are a real line item, not a rounding error.

Then there are the professional fees: the architect or designer, the engineer, the quantity surveyor, the project manager, and the consent costs. These add up to a meaningful share of a commercial rebuild, and they are frequently left out of an owner-estimated figure entirely.

Rebuilding to today's Building Code is the other one people miss. If your building went up decades ago, replacing it means meeting current requirements for seismic performance, fire protection, accessibility and insulation. That is not what you built, and it is not what it cost.

Finally, allow for the time a rebuild takes. A commercial rebuild of any size runs well beyond a year once design, consent and construction are counted, and construction costs do not stand still while you wait. The figure has to hold up at the end of that process, not at the start.

Where the figure quietly goes wrong

Most under-insurance is not carelessness. It is a number that was reasonable when it was set and was never revisited.

Construction costs in New Zealand have moved sharply in recent years, and a sum insured that was accurate five years ago may be well short today. Nothing on your renewal notice tells you this is happening - the figure simply rolls over.

Improvements are the other common gap. A new roof, a fit-out, a mezzanine, extra plant: all of it increases what a rebuild costs, and none of it updates your sum insured automatically.

And a figure that was estimated rather than measured can be out by a great deal. A sum insured worked out properly by someone who does it for a living is a different thing from one arrived at over the phone.

Why being a bit short can cost more than you would think

Your sum insured is the ceiling on your claim. If the real cost of rebuilding comes in above it, the difference is yours to fund.

What surprises people is the average clause, also called co-insurance, which appears in many commercial policies. Where that wording applies and your sum insured sits below the true replacement cost, the insurer can reduce a partial claim in the same proportion that you are under-insured.

In practice: a building that would cost $3 million to replace, insured for $2.1 million, is insured to 70 percent of its value. A $500,000 partial loss is then settled at around 70 percent - roughly $350,000 - leaving about $150,000 for the owner to find, even though the sum insured was never reached and the building is still standing.

That is the part worth understanding. Under-insurance does not only matter in a total loss. It can reduce every claim you make.

How to get a figure you can rely on

The only reliable answer is a professional insurance reinstatement valuation. A registered valuer or quantity surveyor measures the building, applies current construction costs, and accounts for demolition, professional fees and code compliance. It is a defined piece of work with a defined cost, and it is the document that settles the question.

A valuation is not a one-off. Most owners should revisit it every few years, and review the figure at each renewal in between - particularly after any significant work on the building.

Between valuations, an indicative figure is still useful for working out whether your current sum insured is in the right territory or obviously adrift. Our rebuild estimator gives you a rough order of magnitude in about a minute. It is indicative only and it is not a valuation, but it will tell you whether this is a conversation worth having.

That is also where a broker earns their keep. We will tell you when a valuation is warranted, make sure the policy basis and the wording match what you actually own, and check the figure is still doing its job each year rather than letting it roll over untouched.