What is Fire Insurance Valuation?
Fire Insurance Valuation is a valuation report prepared by a Registered Valuer to determine the Fire Insurance Value (FIV) of a property for insurance coverage against fire-related risks. This value does not represent the market value or selling price of the property.
The Fire Insurance Value is assessed on the basis of the current equivalent reinstatement cost, which represents the estimated cost of rebuilding the subject building in the event of total destruction by fire. This includes the cost of reconstruction together with the landlord’s normal fixtures and fittings, as well as an allowance for professional fees associated with the rebuilding process.
Rebuilding cost is defined as the cost of demolishing and clearing away the existing structures and rebuilding them to their original design in modern materials, using modern techniques, to a standard equal to the existing building and in accordance with current building regulations and other statutory requirements. This estimate of the current cost of reconstructing the subject building in the same form, style and condition as when new, are based on prevailing trend of market prices for materials, labour, contractor’s overhead and profits, other related charges and present construction techniques
No allowance is made for credits arising from salvaged materials. As foundations below ground level are generally unlikely to be adversely affected by fire, these costs are excluded from the assessment of the Fire Insurance Value.
What key components are taken into account in the assessment of a property’s Fire Insurance Value?
In general, a Fire Insurance Valuation typically includes the following components:
Building structure (walls, floors, roof, and basements)
Finishes and building services (floor and wall finishes, plaster ceilings, electrical wiring, plumbing, lifts, and air-conditioning systems)
Professional fees (architects, engineers, quantity surveyors, and other consultants)
Demolition and debris removal costs
Compliance with current building regulations and statutory requirements
In determining the Fire Insurance Value, valuers do not take into account the land value, market value of the property, location, site formation works, foundation costs, consequential losses, or loss of rental income.
What are the key differences between Fire Insurance Value and Market Value?
It is not appropriate to base fire insurance coverage on the market value of a property. Market value includes both the land value and the depreciated value of the building, whereas the Fire Insurance Value represents the full reinstatement cost of the building only, without reference to land or depreciation.
It is therefore possible for the Fire Insurance Value to exceed the market value of a property. This commonly occurs in areas where land values are relatively low or where an existing building is significantly depreciated.
Agility Valuers & Property Consultants would like to share the following example case with you:-
The subject property is located in Lembah Beringin. The titled land area is 10,000 square feet. The owner had constructed a double-storey detached house approximately 25 years ago at a cost of RM1,000,000, with a gross floor area of about 4,200 square feet. Over time, the building has experienced normal wear and tear and is presently in fair condition.
The owner has engaged Agility Valuers & Property Consultants to determine both the Market Value and Fire Insurance Value of the property. Following comprehensive market research, data collection, relevant searches, site inspection, and valuation analysis, the recommended values are as follows:
Land Value (by Comparison method of valuation) – 10,000 square feet x RM15psf = RM150,000
Building Value (depreciated building value) – (4,200 x current construction rate RM300psf) x depreciation rate at 30% = RM882,000
Market Value = RM150,000 + RM882,000 = RM1,032,000, say RM1,030,000
Fire Insurance Value (The estimate of rebuilding costs of similar new building for the subject property, based on prevailing market rates for materials and labour and present construction techniques, including contingencies, demolition and debris clearance, and professional fees, but excluding site formation works, external works and land costs) = 4,200 x RM300psf = RM1,260,000
Is it necessary to insure a stratified property (e.g. Condominium Unit)?
For stratified properties, such as condominium units, individual owners are generally not required to insure their units separately for the building structure, as the Management Corporation is required to insure the entire building under a Master Insurance Policy. Insuring the same building separately may result in double insurance.
However, owners should verify the extent of coverage under the master policy, which typically covers the main structure and common areas. Improvements within individual parcels and personal contents usually require separate insurance coverage.
In accordance with the Strata Management Act 2013 (Act 757):
Sub-section 94(1) – any building shall be insured for at least the reinstatement value of the building indicated by the last valuation obtained for the building;
Sub-section 94(2) – for the purpose of determining the reinstatement value of the building that is required to be insured under this Part, a reinstatement valuation of the building shall be obtained from a registered valuer at least once every five years.
Why is fire insurance important?
If a building is insured based on an accurate reinstatement value, the insured will be adequately compensated in the event of fire damage. Where the sum insured is understated, insurers may apply the average clause, resulting in only a proportion of the claim being payable.
Fire insurance provides essential financial protection against the high costs of repairing or rebuilding a damaged property, which can amount to hundreds of thousands or even millions of Ringgit.
In Malaysia, financial institutions typically require a valid fire insurance policy as part of their loan conditions to safeguard their interest in the property. Most banks and insurers also require a formal Fire Insurance Valuation prepared by a Registered Valuer.
For commercial properties such as shops, offices, hotels, and factories, fire insurance can be extended to include loss of rent or business interruption, helping to maintain income while repairs or reconstruction are being carried out.
Additionally, some tenancy agreements, strata by-laws, and management bodies mandate the maintenance of valid insurance coverage as part of ownership or tenancy obligations.
Ultimately, fire insurance offers peace of mind, ensuring that a major asset is properly protected and allowing owners and occupiers to focus on the use or leasing of the property without undue concern over catastrophic risks.
Please contact Agility Valuers & Property Consultants should you require any further assistance.
Frequently Asked Questions
What is a Fire Insurance Valuation?
A Fire Insurance Valuation is a report prepared by a Registered Valuer to determine the cost of rebuilding a property if it is totally destroyed by fire. This value is called the Fire Insurance Value (FIV). It includes rebuilding costs, fixtures and fittings, professional fees, and demolition costs, but it is not the same as the property’s market value or selling price.
How is the Fire Insurance Value calculated?
The Fire Insurance Value is based on the current cost of demolishing the damaged building and rebuilding it to the same standard using modern materials and construction methods. It considers current prices for materials, labour, contractor’s costs, and professional fees, and follows current building regulations. Salvaged materials and below-ground foundation costs are not included.
What is included and excluded in a Fire Insurance Valuation?
Included:
Building structure (walls, floors, roof, basement)
Finishes and services (electrical, plumbing, lifts, air-conditioning, ceilings, fittings)
Professional fees
Demolition and debris removal
Compliance with regulations
Excluded:
Land and market value
Site and location-related works
Below-ground foundation costs
Loss of rent and other indirect losses
Why can the Fire Insurance Value be higher than the market value?
Market value includes the land and the depreciated building. Fire Insurance Value only covers the cost to rebuild the building as new. In areas with low land value or older buildings, the rebuilding cost can be higher than the property’s market value.
Do condominium owners need their own Fire Insurance Valuation?
Usually, the Management Corporation insures the main building under a master policy. Owners should check what this policy covers and arrange separate insurance for renovations and personal belongings inside their units. By law, a reinstatement valuation must be done by a Registered Valuer at least once every five years.
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