essential insurance coverage

When arranging insurance for a commercial property, many owners make a common mistake: using the purchase price as the sum insured.

On the surface, it feels logical. If that’s what you paid for the property, surely that’s what it’s worth? However, the purchase price doesn’t always reflect the actual cost of rebuilding.

Purchase Price vs. Rebuild Value

It’s important to understand the difference between the purchase price and rebuild value when it comes time to insuring your property. Yes, both relate to what your property is worth, but they represent and serve very different things.

Purchase Price

The purchase price of a property represents the total amount paid to acquire it on the market. It’s affected by several factors, which include:

The value of the land.
The property’s location and market demand.
Broader economic conditions at the time of purchase.

None of these is relevant to an insurer if your building is damaged or destroyed. Insurance is about replacing the structure itself, not the land it sits on.

Rebuild Value

The sum insured is generally expected to reflect the full replacement value of the building, which includes:

Demolition and debris removal.
Professional fees (engineers, architects, surveyors).
Current labour and material costs.
Compliance upgrades (to meet today’s building codes).

What’s the difference?

The key difference between purchase price and rebuild value lies in what each represents. The purchase price reflects the property’s market value, including the land, location, and broader economic factors, while the rebuild value focuses solely on the cost to reconstruct the building if it were damaged or destroyed. This includes demolition, debris removal, professional fees, materials, labour, and any upgrades needed to meet current building codes. In short, insurance covers the cost to rebuild, not the market price you paid.

The cost of getting it wrong

If your sum insured is based on the purchase price rather than a professional valuation, you risk being underinsured. And underinsurance doesn’t just affect you in the event of a total loss. It can also reduce your payout even in the case of a partial claim. For example:

A property was purchased for $2 million, but the actual rebuild cost is $3 million
The sum insured is set at $2 million (instead of $3 million).
A fire causes $600,000 worth of damage
Because the building was underinsured by one-third, the insurer may pay only two-thirds of the claim (about $400,000)

This could leave you, the owner, with $200,000 out of pocket expenses even though the damage wasn’t a total loss.

professional property valuations matter to help you determine the right cost to insure your property for

Why professional property valuations matter

Construction costs in Australia have surged in recent years, driven by shortages of materials and skilled labour. Without a proper valuation, it’s easy to underestimate the cost of rebuilding today compared to when you purchased the property. A professional building valuation gives you:

Confidence that your sums insured are accurate
Protection from co-insurance penalties
Peace of mind that your biggest asset is covered correctly

It’s best to arrange a professional building valuation every few years and review your insurance sums annually. That way, your cover keeps pace with any changes to your property, as well as rising rebuild costs and inflation.

Avoid underinsurance with proper valuation

The purchase price reflects market conditions, not rebuilding costs. Having a commercial property is already a significant investment, and underinsurance can create unexpected financial strain during claims. To safeguard your investment, arrange a professional building valuation and review it regularly. That way, your insurance truly reflects today’s replacement costs, not yesterday’s market value.

When it comes to protecting your assets and ensuring the sums are properly accounted for, a Broker would be a huge help. If you want advice or are interested in learning about available options for commercial property coverage, reach out to East West Insurance Brokers today.

Survey after survey, business executives have unanimously agreed to one thing: the risk of a cyber attack as their biggest fear. Reviewing the most recent Allianz Risk Barometer, cyber incidents and business interruption tie as the top concerns of Australian businesses, with over 40% of responses to these risks.

These results come as no surprise to cyber security experts, with cyber crimes becoming increasingly common especially since the pandemic began. At the start of Covid-19, we saw a spike in the number of ransomware attacks against businesses of all sizes. With the continuous evolution and advancement of these ransomware, they are becoming more successful in their attempts to harm organisations, costing businesses billions of dollars every year. With many of us continuing to work remotely in the endemic stage, there are no signs of cybercrimes slowing down.

According to the Australian Cyber Security Centre (ACSC), the 2020/21 financial year saw over 67,500 cybercrime reports made via ReportCyber. In an everyday perspective, one cybercrime is reported approximately every eight minutes in Australia. That’s a staggering increase of nearly 13% from the previous financial year. The average 2017 cyber claim has risen over three times the severity of previous years, with ransomware incidents making up over 30% of claims. With cyber claims on the rise, it is no surprise that insurers are tightening their belts to accommodate the high levels of risk and cost of claims. The result of this will ultimately see the cost of premiums go up as well.

What does this mean for SME business owners?

As insurers are becoming more stringent with their requirements, it is increasingly difficult to get covered against cyber risks. You will need to show insurers that you are taking the necessary (and improved) steps to prevent a compromise to your IT systems. A previous mitigation plan may no longer apply as it could be insufficient to modern malware, and it will be tough to secure an insurer who will be willing to underwrite the risk. For bigger companies with an in-house IT department, preparing an updated mitigation plan may not be an issue. However, for small companies without a dedicated IT security team, this can prove to be a challenge.

Fortunately, there are steps that SMEs can take to meet the strict criteria set out by insurers. Mitigation is key when it comes to cyber security. The help of an experienced insurance broker can help bridge the gap and make it less complicated for small businesses to get covered. Remember, not all cyber policies offer the same level of protection. It can be challenging to determine the best insurance policy for your business. Engaging a broker will not only ease the application process, but they will also advise the steps you need to take to ensure your business continues running smoothly.

At East West Insurance Brokers, we know what the insurers are after. We’ll learn the ins and outs of your business and work with you to create a cyber security plan so you can get a fitting cyber insurance cover for your business. With hackers always at work and cyber attacks occurring more frequently, it’s best to act now before it is too late.

1800 809 132 | he***@******om.au | www.ewib.com.au

Important Note: All insurance policies have exclusions. Please refer to the Product Disclosure Statement or Policy Wording to decide whether an insurance policy meets your needs.