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.”
- Agreed Value – Carrier/Client agree the building is $1,000,000. Payout for complete and partial losses are fully paid (less deductible).
- 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.
- 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).
- 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