“Undervaluing your assets could significantly impact your ministry”
Statistics gathered from our 2020-2021 Church Property portfolio found that over 80% of properties protected had not had their values amended by the owners from the previous year.
Church buildings are often used for much more than just our weekly worship. They are a hub for many communities, providing facilities for your extended church programs as well as opportunity to host a range of community programs and events.
Protecting an asset which has often been realised after many years of faithful dedication from your members is worth safeguarding, but when it comes to placing a value on your property, many churches fail to adequately declare the true value of their buildings and contents.
Failing to regularly review your declared values can lead to significant financial, operational, and reputational impacts for your organisation. Following are some common misconceptions around valuing your church buildings and contents.
1. We didn’t even pay that much to buy the property
What the real estate market values your property at is very different to the replacement cost of your buildings. Most insurance policies are based on a reinstatement value or sometimes what is known as a “new for old replacement”.
The cost of repairing or completely rebuilding a church building is vastly different to a real estate value and should also include additional costs such as removing debris (which can be expensive if asbestos is present), architect fees, surveyors, permit fees and so on.
An insurance policy will pay to replace or rebuild the existing building with something of similar size and construction. These costs are vastly different to how the real estate market would value your property.
2. We would build something completely different
We appreciate that churches need change over time, and if you were to rebuild, the property may look and function differently from what you have today.
However, the declared value of your property must represent the cost to reinstate the existing building. Insurers are usually extremely flexible and understand that the original design may not meet your current needs.
Your insurance will pay for replacement but not “betterment” so providing the changes do not increase the cost to the insurer you should not encounter any difficulties in having amendments made to your design.
3. We would rebuild with the assistance of our Church
Whilst your property may have originally been built from donated materials and been heavily subsidised by church members providing volunteer labour, it is not guaranteed that the same level of donations or volunteered services will be available in the event of a significant loss.
Secondly, in the instance of a significant loss, your insurer will appoint a loss adjuster who in turn will likely engage a commercial builder to carry out the required work.
4. Declaring a lower value means we will pay a lower premium
Skimping on insurance is a false economy. No Pastor wants to stand up in front of their church and explain that whilst they saved $1,000 on their building insurance, they now have a $100,000 shortfall in a claim which has been subject to the Average Clause.
To fully benefit from property protection, it is important that the declared value is equal to the reinstatement value of the property that you are protecting.
5. What we’ve declared will be enough to replace what we need
If you choose to declare your assets for less than their replacement /reinstatement value, it is deemed that you have opted to take responsibility for the balance of the value of your assets. In these circumstances, should a claim arise the Average/Under Protection Clause may apply.
Insurers recognise that it may not always be possible for people to accurately determine the exact replacement value of their property, and so they make allowance for that. Insurers will only apply the Average Clause if the Insured or Declared Value is less than 85% of the Replacement Value.
So, what is the Average/Under Protection Clause? The ACS Mutual PDS sets this clause out as follows:
Section 1
7.2 AVERAGE/UNDERPROTECTION
7.2.1 the Member is required to declare the full value calculated in accordance with the Basis of Settlement Clause as applicable at the commencement of the Period of Protection
7.2.2 in the event of a claim, the money otherwise payable under Section 1 of this Protection shall be the proportion that the Member’s declaration at the time of the commencement of the Period of Protection of the value of all Property Protected at the Situation to which the Damaged item or items belong bears to 85% of the value of all such property as at the time of the commencement of the Period of Protection calculated in accordance with the Basis of Settlement condition.
7.2.3 this Condition 7.2 shall not apply if the amount of the Damage does not exceed 10% of the amount of the Member’s declaration of value for that situation
Notwithstanding the 85% allowance, following is a simple explanation of how the Average Clause works:
For example, if the replacement value of your property is $10,000,000 (current value) and you declare it for $5,000,000 (sum insured) you will be under declaring the property 50%. In the event of a partial loss, of say $1,000,000 (claim), you will only recover $500,000 (payout) [less any applicable retention] or 50% of your loss.
The simple explanation is, if at the time of the loss, the property is declared for less than the full replacement value, then you are considered responsible for the difference and the claim will be paid proportionately.
One of the reasons we advise against under-declaring is that in case of any loss, you will not have enough to fully reinstate your property.
Engage Experts
We recommend seeking the assistance of Commercial Builders, Quantity Surveyors or Professional Valuers to determine appropriate levels of protection.
Some of these services may incur a cost to prepare an accurate replacement value of your property, however it is an investment in ensuring that you are properly protecting your church assets.
Contents – are they adequately protected?
Similarly, because of changes in value and price inflation, contents also may not be adequately insured. Contents should be insured on a “new for old” replacement basis. As an example, consider an 8-year-old sound mixing desk that is destroyed in a fire. To replace it with another 8-year-old mixer may cost $500, to replace it with a new one may cost $2500. When you nominate a sum insured on your contents you should insure for the “new for old” replacement value, $2500 in the case of our example.
You will need to maintain a register or Contents Inventory of your contents showing the likely replacement cost for items of a similar nature.
The Contents Inventory should be updated as additional items are purchased and your estimate of the replacement costs should be revised annually. The declared value for your contents protection should be changed to reflect the increased values.
Click the button below to download a copy of our fillable Church Contents Inventory below:
In addition, use the technology that we all generally have in our pocket and take photos or video footage of your equipment on your smart phone. This type of record is valuable in providing you with a visual of your assets and is just a valid method of providing proof of ownership in the event of a claim.
When items of significant value are purchased, be sure to notify your insurer or broker immediately so your cover can be adjusted appropriately.
In the event of a loss resulting in an insurance claim, being able to provide a register of your contents can make the settlement of your claim simpler and faster. Provided your declared value is based on the replacement value of the listed items you are likely to receive your maximum entitlement under your protection.
If it has been some time since you have thoroughly reviewed your church building and contents protection, now is the time to get on the front foot and take stock and ensure that your values accurately represent the value of your assets.
Don’t be caught out with protection that isn’t able to fully replace or rebuild what you and your church have worked so hard to build and achieve.
Contact our team at ACS Insurance Services today to discuss your Property Protection needs.
DISCLAIMER: The information on this website reflect some of the commercial aspects and potential risks/obligations for your Church, School or Organisation. The information is given as a guide only and does not represent a definitive list or legal view in any way shape or form. You are advised to seek your own professional advice on all your individual needs. ACS Financial Pty Ltd (ACN 062 448 122) (AFSL 247388).