Exactly a year ago, inflation was at an all-time low at 0.36 percent in October 2013. The all-time high was in November 1974 at 14.24 percent, with an average over the last 40 years of four percent, according to the Department of Statistics. Inflation is primarily dominated by government monetary policy and oil prices, as we saw with the 2008 spike reaching a crescendo in September at 6.03 percent. Strictly speaking, the implementation of VAT should not be inflationary on its own if the government adjusts its monetary policy and lowers other taxes like customs duties, but these debates are better left to the economists. Nonetheless, Bahamians are concerned about the uncertainty of pricing and costs of all commodities in 2015 which are bound to fluctuate in the first instance.
As previously discussed in this column, we know how seriously the law takes the average clause in property insurance policies - especially with The Bahamas facing hurricane threats year after year as a way of life. Adequacy of sums insured is always a concern for property owners, banks and of course, insurers. The only way to have the rebuilding cost of your property assessed is by a qualified professional surveyor in order to avoid the risk of underinsurance, so that you can be properly indemnified: that is, put back in the exact financial position you were before the loss.
Normally, the basis of indemnity when settling a claim is the rebuilding cost of the insured damage at the time of the loss. In the case of a large commercial property, six or 10 months into the policy period, the rebuilding cost of the building may increase due to normal inflation factors. Thus, sums insured which were adequate at the beginning of the policy period may not be enough to provide indemnity toward the end of the policy period.
Instead of factoring the potential increased inflationary costs into the sum insured and paying the full extra premium from the beginning of the policy period, a more economical way to expand the cover to include these allowances is to endorse the property policy with a "day one basis of reinstatement" clause.
A "day one basis of reinstatement" endorsement will not only address the aspect of inflation and escalation in rebuilding costs more thoroughly within the wording of the endorsement; but the "escalation" will be expressed via the endorsement as a percentage on the declared value at day one of the policy and not as a part of the sums insured. This will also influence the premium as the premium charged for this extension will be far less than charging escalation as a part of the sums insured.
When considering this basis of cover, it is critical that the sum insured declared at day one of the policy is accurate, therefore it is prudent to have a thorough survey done by a highly qualified professional. This declared value should include the cost of rebuilding the property including any costs such as demolition and debris removal; professional fees and any taxes such as VAT on day one of the policy period.
Once this base figure is established, your broker will negotiate with your insurer a provision which is a percentage uplift on the declared value to reflect the affect of inflation over the reinstatement period, which comprises the policy period and possibly a portion of the construction/rebuilding period which may or may not be concurrent.
In order to manage expectations at claim time, it is always prudent to be aware of the changing costs of replacement for all your insured property, whether it is construction costs of a building or the purchase price of furniture and equipment. Also, make sure you check with your broker about your basis of indemnity whether it is on a replacement basis (new-for-old) or if it is on a depreciated basis, or if there are any provisions for a change in costs over the reinstatement period including automatic increase in sums insured or a "day one basis of reinstatement" endorsement.

o Stephanie Cleare is a fully licensed and qualified account executive at Tavares & Higgs Insurance with 12 years experience in the Bahamian insurance industry. Email her at scleare@tavareshiggs.com.

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