Unlike many consumer goods, fruits of real estate are generally realized over a long period of time. Therefore, it is very important to know the market value of the real estate property, keeping in mind the current economic and social trends as well as current laws related to real estate scenario and government policies. It helps in determining fair market value and gives relevant information of the property to all the involved parties. Let us explore some important aspects of valuation:

Meaning and Need of Valuation in Property Insurance:

Fire/Industrial All Risk (IAR): 

Valuation is the process of making an estimate for the real worth of property.

Fire/IAR policies cover loss or damage to property arising out of perils covered.

In those events of claim, loss can be settled by following two methods:

Market Value Method -Market Value refers to the present cost of construction of similar property, after deducting depreciation from the cost. Depreciation is based on age, usage, maintenance etc. Here depreciation refers to actual intrinsic physical depreciation.

Reinstatement value  (RIV) method –  Reinstatement value refers to the value at which the damaged property can be reinstated or replaced by a new property of same kind, without deducting depreciation.

For settlement of loss on RIV basis, Sum Insured should be equal to RIV value.

In case at the time of loss if it is found that the  value of reinstatement or  replacement is more than the SI opted under the policy than the claim will get reduced proportionately as an impact of Under Insurance.

For example:

Present Sum insured in the policy: Rs. 1 Crore

RIV Value of property: Rs. 3 Crore

At the time of loss the amount you spend to repair/replacement: Rs. 0.5 Crore

If we go for current SI the claim amount payable to you will be;

Under Insurance=66.67%

Loss payable= 0.5 Crore*33.33%

Loss payable = Rs. 16, 66,500 (net of excess and salvage)

To avoid impact of under insurance, valuation is the method to arrive today’s replacement cost of property of same kind.

If insurance is  taken on adequate sum insured, we may protect it from, 

• Under Insurance (By Avoiding Deduction in Claims) &
• Over Insurance (Savings from paying Additional Premium on excess sum insured of property).

So valuation of property is recommended for adequate sum insured.

Valuation of property estimated accurately is very essential for sellers, home purchasers, lenders, real estate investors and insurance companies and can be a game changer, if not done right. Hence, keep the above points in mind before zeroing on any real estate property.