What does the definition of Indemnity mean when it comes to buildings?

Structural Building DamageI read with interest the latest Insurance update from DLA Piper New Zealand. Crossley Gates and his team provide a very useful service to the industry with these updates. The interest to me on this matter was that the update suggests that in New Zealand it has been common practice for an Indemnity Value on a building to be set on the reduction of the market value before and after the date of the damage. 

This is not the common practice in Australia in my experience and the case of Brescia Furniture Pty Ltd v. QBE (Australia) Ltd [2007] NSWSC confirmed the position that where the property is not for sale, the true measure of indemnity is the value to the insured which is the replacement value of the building less an allowance for its age and condition. The position alters when the building was for sale at the time of the damage. In such a case the true measure of indemnity, which as we know is to put the insured back in the same position as nearest money will allow to the position they would have enjoyed but for the loss is the difference between the pre and post loss sale value. This can be complicated where there is a devaluation or increase in value of the land. For example the land value in a beautiful forested area may drop considerably after say a bush fire, while properties with a beautiful river view may again drop immediately following a serious flooding event. 

The third measure, which I’ve only had to use on rare occasions is the rentable value of the property. This is the measure of indemnity when, say a building is marked for demolition and the true measure of the value of the building is the net rentable income after allowances for agents fees, repairs and maintenance and the like, between the date of the damage and when the building was expected to be demolished.

I explore this in my book ‘Manning’s Six Principles of General Insurance – A Comprehensive Guide to Utmost Good Faith, Indemnity, Subrogation, Contribution, Insurable Interest & Proximate Cause’. To learn more about Manning’s Six Principles of General Insurance click here.

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