More on the Question of Extra Cost of Reinstatement.
I am pleased that one of the many readers of this blog posted a comment on the question put to me on Extra Cost of Reinstatement (see above). The comment comes from Adam Matteson, Regional Director of Arch Underwriting at Lloyd’s (Australia) Pty Ltd, based in Sydney. Adam is the co-presenter of the ANZIIF ISR Master Class with me and also sits with me on the Program Advisory Board of the Master of Insurance Law and Practice at Victoria University.
Thanks Adam for your valuable insight to this issue. [I have added any extra comments in square brackets]
This issue is one that confronts all of the major cities of Australia, where increased density of land use is being encouraged to improve housing and working use of existing land.
This is an issue we raise in the ANZIIf ISR masterclass , as there have been contentious claims, where this matter has been litigated .
Aside from the ability to rebuild elsewhere, the Insured has the ability to claim the indemnity value of the property as a settlement.
On this issue, there are 2 considerations :
1. The Mark 4 does not define Indemnity Value. The Mark 5 does define Indemnity Value as ” taking into consideration age , condition and remaining useful life ”
2. A block of land in this instance is actually worth more as a flat block of land ( due its development potential ). Has the Insured actually suffered a financial loss?
It is clear from litigated claims that the improved value of the land does not come into contention as a measure of indemnity , and that the measure of indemnity is clearly the replacement value less “age condition and remaining useful life”
As an underwriter, though, I believe that this issue can be dealt with at the underwriting phase. [It is great to see that the broker is acting very professionally and doing just that in this instance.]
By having a clear understanding as to the Insured”s intention with the property pre loss, by checking the current zoning as to whether the land is being used for its highest and best use, by checking as to any development applications , and by structuring a basis of settleent that can include the Mark 5 indemnity or market value definitions can all assist in clarity post loss.
As we show in the ISR masterclass, their are instances where a requested $6m Reinstatement and Replacement slip was negotiated and agreed at a $500k Removal of Debris Sum Insured, saving the Insured money and providing clarity to the Insurer. In that instance, the Insured was a developer and had no intention of rebuilding the current building on this site, or any other.
As a matter of interest, the Adelaide Council website is one of the best in the country for determining the new allowed building heights , as they differ in various parts of the city. The site is a 3d enabled geosptial site that is easily navigatable , and should be standard viewing for any broker or nderwriter looking at risks in the Adelaide area. See http://www.adelaidecitycouncil.com/development/3d-city-model/