Three figures swirl around when it comes to the building’s sum insured: the market price, the book value, and the rebuilding cost. Only the last one belongs in an insurance policy – the other two are a typical source of underinsurance (or, just as easily, overinsurance).
- The market price also prices in the land and the location – which is misleading for insurance purposes.
- Book value is an accounting category – because of depreciation, it’s often a fraction of the replacement cost.
- The right basis: what it would cost to rebuild the same building today – this can be estimated, and kept up to date.
Why not the market price?
The market price tells you what the property would sell for – including the land, the value of the neighbourhood, demand. But in a claim, it’s not the land that burns down: the building has to be rebuilt, at today’s material and labour costs. In a prime location, the market price can be far higher than the rebuilding cost (a sign of overinsurance); in an industrial setting, it can be far lower (a risk of underinsurance). Neither direction is good: insurance works accurately only on the real rebuilding cost.
Why not the book value?
Accounting records show the building at purchase price less depreciation – an older hall’s book value can approach zero, even though rebuilding it has never been more expensive. The accounting figure is excellent for tax and accounting purposes, but it’s almost always unsuitable as a sum insured. If the policy shows a round, old figure, there’s a good chance that’s where it came from – time to take another look.
How can it be estimated well?
The practical approach is unit cost: calculate the rebuilding cost per square metre based on the building’s type, structure and fit-out, then add any special features (technical flooring, cranes, cold-storage areas). For a larger or more complex site, bringing in a valuer can also be justified. The goal isn’t a figure accurate to the last forint, but one that’s right in order of magnitude and kept up to date – maintained through indexation and the annual check.
A rented building is a different case: there, the building sum insured is the landlord’s concern – the company’s concern is the tenant’s fit-out and its own assets: who insures what.
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