A home’s selling price may be the figure owners know best, but it is not the figure they should automatically use for building insurance. Insuring a property for its market value rather than what it would cost to rebuild is a common mistake that can leave homeowners paying too much for cover or, more seriously, facing a substantial shortfall when they claim following a significant loss like losing their home in a flood or fire.
Naked Insurance has introduced a free online building insurance calculator to help homeowners estimate a more realistic replacement value and understand the costs that should be included in that figure.
“Most people encounter the market value of their home when they buy, sell or apply for finance, so it is understandable that they may reach for that number when buying insurance,” says Sumarie Greybe, co-founder of Naked Insurance. “But the land, neighbourhood and property market influence what a home will sell for. Building insurance is concerned with a different question: what would it cost to demolish and reconstruct the physical home and its permanent fixtures?”
Greybe says the distinction is especially relevant for Johannesburg homeowners. “Property prices in Johannesburg have been under pressure relative to parts of the Western Cape, where semigration and demand from international buyers have supported the market. But a lower selling price does not necessarily mean a home would cost less to rebuild. If Johannesburg homeowners use their property’s market value to choose their sum insured, they could therefore be particularly vulnerable to underinsurance. Our calculator gives homeowners an easy way to sense-check their building sum insured against estimated rebuilding costs rather than relying on the property’s selling price.”
Calculating a realistic replacement value
The calculator is designed to be useful even when a homeowner does not have every specification at hand. It uses realistic default assumptions, including building costs relevant to each province, to produce an initial estimate. You can then refine the result by providing information about your property. The more detail you add, the more tailored and accurate the estimate becomes.
Easy-to-follow prompts guide users through information about the size and features of the main dwelling, the standard of finishes, and any additional structures or permanent fixtures. These may include garages, carports and sheds, as well as a swimming pool, solar installation, water tank, fitted carpets, integrated appliances, fireplaces and light fittings.
The tool also automatically brings often overlooked rebuilding expenses into the calculation, such as demolition, rubble removal, earthworks, site preparation, professional fees and municipal costs. This gives homeowners a structured way to arrive at an estimate without needing to build the calculation from scratch themselves.
“We wanted to make the tool as easy as possible to use, while still allowing for enough detail to reflect the realities of an individual property,” says Greybe. “A homeowner can get an initial indication quickly and then refine it using the information they have on hand.”
Why the wrong value can reduce a claim
Market value is the price a property might achieve on the open market. It is shaped by factors such as location, demand, nearby properties, economic conditions and the value of the land. Replacement value is the estimated cost of rebuilding the insured structures and permanent fixtures with new materials after an insured loss.
“The relationship between these two figures can differ considerably from one area to another,” says Greybe. “In a sought-after neighbourhood where land is expensive, the market value may be higher than the cost of rebuilding the structures. In a subdued property market, however, the selling price may be lower than the cost of rebuilding – creating a risk of underinsurance if the homeowner uses market value to choose their cover.”
If a home is insured for more than its realistic replacement value, the owner may pay a higher premium without receiving a correspondingly larger payout. If it is insured for less, the financial consequences can be more severe.
Many building insurance policies include an average clause. This means a claim may be reduced in the same proportion that the property is underinsured. For example, if the true replacement value is R2 million but the property is insured for R1.4 million, it is insured for only 70% of its replacement value. An insurer could therefore pay only 70% of a covered repair claim, less any applicable excess.
“The impact is not limited to the complete destruction of a home,” says Greybe. “Underinsurance can also affect more everyday claims, such as storm damage to a roof. Homeowners may only discover the gap when they need their cover most.”
When to review your building cover
A home’s replacement value should be reviewed regularly, particularly after a major renovation, an extension or the installation of permanent features such as solar panels. Construction and material costs also change over time, which means an amount that was appropriate a few years ago may no longer be sufficient.
Greybe adds: “The calculator gives new homeowners a practical starting point for choosing their building cover and gives existing homeowners an easy way to sense-check whether their insured amount still reflects the property they have today. If interested, you can continue to get a final quote to see what building cover would cost.”
Use the free Naked building insurance calculator: https://www.naked.insure/building-insurance/calculator