Homes and commercial buildings can be a significant portion of your assets and/or a critical piece of income generation.  Maintaining quality property insurance is an important component that can assist in your long term financial stability or if done poorly can dampen your future goals.  If you have real property get it insured in a way that is designed for you!

Property valuation is one component of property insurance that affects you in the event of a claim.  Here are a couple considerations:

Part I – Personal Lines | Homeowners Insurance

“I bought my home for $300,000.  Why do I need to insure it for $450,000?”

Insurance companies want you have a replacement valuation on your home, not a market value on your home.

Replacement Value – The amount it cost to rebuild your home.

Market Value – The amount you can sell/buy your home for.

With some exceptions, if you have an older home chances are it costs more to rebuild your home than it was to buy your home.  To calculate these values insurance carriers use building valuation software to project the cost to rebuild your home.  These values can vary from carrier to carrier and it is important to understand.  While you may be “OK” to rebuild a home to that of less quality or square footage an insurance carrier wants to insure a home as accurately as possible to the rebuild value.  This is because most standard products are meant to restore an insured to a condition similar to what they were in before the claim.

Is my home valued correctly? Here are some things that can help you:

Your Agent – Your agent will review the valuation estimations of multiple carriers and can help get you comfortable.

125% Increased Cost Endorsement – This endorsement provides wiggle room for reconstruction of up to 125% of the insured amount listed on your policy.

Guaranteed Replacement Cost Endorsement – This endorsement provides reconstruction of your home with like kind/quality – guaranteed.  It will pay above any value listed on your policy with certain conditions being met.

Residential Home Survey – Some carriers will complete on-site home surveys to determine an accurate value.  The higher the home value the more extensive the survey.  While it depends on the carrier, typically homes valued between $300,000 – $750,000 get an external survey.  Homes valued at greater than $750,000 can include a more detailed interior/exterior survey.  The goal is to provide accurate information to adequately secure the assets of the client.

There are unique situations in which replacement cost valuation would not be the preferred method, talk with your agent.

Part II – Commercial Lines | Property Insurance

Commercial lines typically has a little more flexibility on property insurance than personal lines.  Here are three common valuation methods that can give your property the coverage that meets your needs.

Replacement Cost Value – “I need this building for my business and if it goes down I need to rebuild.”

  1. Agreed Value – Carrier/Client agree the building is $1,000,000. Payout for complete and partial losses are fully paid (less deductible).
  2. Co-Insurance – If done correctly, this feature allows flexibility for the insured’s specific coverage needs. If done incorrectly, this feature can create a claims nightmare.
    1. Insure a $1,000,000 building at $800,000 with 80% co-insurance provision. Payout for complete and partial losses are fully paid (less deductible).
    2. Insure a $1,000,000 building at $600,000 with 80% co-insurance provision. Total loss payout is $600,000 (less deductible).  Partial loss is penalized by 25% for being improperly underinsured.  Example: A $200,000 partial loss has a $150,000 payout (less deductible).

Functional Replacement Value – “I bought this building, but if it goes down I really only need 60% of it.”

If you had a $1,000,000 building but you could get by with a $600,000 building the insurance carrier is willing to base the insured value at $600,000 without a co-insurance provision/penalty.  It allows the insured some flexibility and the ability to settle a loss with a less costly functioning equivalent.   The rate on functional replacement value is higher but in certain situations it can save on overall costs.

Actual Cash Value – “I’m good with minimal insurance.  I understand any claim payment would be lessened by depreciation.”

This coverage is often used in situations in which the insurance carrier is not willing to fully cover a building due to its condition or the owner of the property is willing to accept a smaller claims payment for premium savings.

Want an independent review?  Contact us.

Jeremy Hyde | Colligan & Company

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About the Author: Jeremy Hyde

Christian, MK/PK, Brother, Husband of a magnificent wife, Father of three sons and two daughters, Insurance dork, Sports and Racing fan, Competitor, Coach, Early riser, Grill-man, Yearner of sand dunes and Lake Michigan, Owner of a Yorkie named Gerald, Wannabe basketball player, Reluctant handyman, Car enthusiast, Admirer of passion and excellence and design...

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29 Comments

  1. Karisa Kretzinger January 30, 2019 at 12:38 am - Reply

    I read a lot online, but never comment.But your post wow!!. I have to say that the article was very well written, simple and elegant. Well done Expert.

  2. Matt March 6, 2020 at 8:49 pm - Reply

    I like what you guys are up too. Such clever work and coverage! Keep up the excellent works guys I’ve included you guys to my blogroll.

  3. Serena B March 17, 2020 at 3:23 am - Reply

    Good topic on property insurance, lots of different ways to do it in Indiana. Thanks for excellent info

  4. Carol Strutt April 5, 2020 at 5:45 pm - Reply

    Excellent, very informative. I’m wondering why the other insurance specialists of this sector don’t realize this. You should continue your writing. I’m sure, you’ve a great readers’ base already!

  5. Brand Maxtem April 9, 2020 at 11:53 am - Reply

    I own several investment properties and found this to be useful advice for my insurance.

  6. Joan Waggoner April 22, 2020 at 1:32 pm - Reply

    I have some commercial buildings that could use some better valuations. I just left a note on your email. Please give me a call.

  7. Jack April 22, 2020 at 8:27 pm - Reply

    This is good insurance info for investment property

  8. Mark Daily April 23, 2020 at 12:15 am - Reply

    I have several rentals and I only want to insure them for what I bought them for.

  9. Sophia Farber May 8, 2020 at 10:30 pm - Reply

    I’m a property investor and it’s important to know the insurance available.

  10. Eric June 25, 2020 at 11:31 am - Reply

    Property investors you need this to be done right by a qualified insurance agent

  11. Owen June 29, 2020 at 1:13 pm - Reply

    Property investors do not know enough about this and just go with the cheap too much. I’ve seen it with many claims issues.

  12. Amy Bulkhead July 16, 2020 at 2:33 am - Reply

    Investors in property should really understand this.

  13. Jessie W July 22, 2020 at 1:46 am - Reply

    Coinsurance penalty is a big deal but not until you have a big loss!

  14. Sandy July 25, 2020 at 11:11 am - Reply

    Thank you for writing this… it makes sense

  15. Oscar Patino November 7, 2020 at 12:04 am - Reply

    Most people just care about cost including investors. The pudding is in the claim.

  16. Aaron December 20, 2020 at 11:11 am - Reply

    I like your agency

  17. Sammy December 20, 2020 at 5:02 pm - Reply

    Investors need to know all the risks!

  18. Ahmed December 28, 2020 at 5:43 pm - Reply

    Good info… i bet a lot of property investors SHOULD know about this

  19. Cindy December 31, 2020 at 7:22 am - Reply

    Investors really need to understand this issue.

  20. Brigette January 9, 2021 at 4:12 am - Reply

    Hi thеre! Tһis post coulԀ not be ѡritten any better! I see too many “investors” not know what they are doing!!!

  21. Lacey January 17, 2021 at 10:38 pm - Reply

    I have a dozen rental homes and I’ve never thought about this before, guess I’ve lucked out so far

  22. Sammy Watkins February 8, 2021 at 11:37 pm - Reply

    Property investors should really understand what they have better, I know I didn’t

  23. Kanny February 15, 2021 at 9:45 am - Reply

    I own 15 rental properties, this is good to know

  24. Barry February 17, 2021 at 12:49 am - Reply

    Property insurance can be tricky. Most commercial brokers also don’t know what they are talking about when so you better have a good agent to rely on

  25. Matt February 26, 2021 at 10:08 pm - Reply

    Saabs are unique and cool cars, sweeeet

  26. Nathan W March 1, 2021 at 5:50 pm - Reply

    i have 27 rental homes, most all of them are ACV and I’m comfortable with it because they were very cheap to buy

  27. Frank S March 3, 2021 at 12:02 pm - Reply

    Not enough investors think about this, good idea to lay out some differences in property insurance

  28. Abbi Smith March 31, 2021 at 4:40 pm - Reply

    Insured to value is an issue with a lot of investors…

  29. Kit December 14, 2021 at 9:55 pm - Reply

    Thanks for the property info

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