Many people don’t pay attention to property values until they have a claim, and then they can only hope that their limits are adequate.  Unfortunately, in many situations, such as the wildfires that ravaged San Diego County in 2003, or the Joplin tornado in 2011, too many people found that they were inadequately insured.

Spending a little extra time making certain your property is adequately insured is worth the investment.  The process will require forethought and research, but the result will be a more adequate property valuation.

How is property valued?

 On most direct damage property forms, coverage is either valued on a “replacement cost” basis or an “actual cash value basis.”  Replacement cost is defined as the cost to replace the property, new today, with materials of like kind and quality.  Actual cash value is the replacement cost less actual physical depreciation (not accelerated accounting depreciation).  In some cases, actual cash value might also make a deduction for economic obsolescence, as well as actual physical depreciation.

The only difference between replacement cost and actual cash value is depreciation.  If your property is brand new, and has not had any depreciation, there is no no difference between the two methods.

You should also be aware that accounting or book value has no relevance to either method of valuation, and that the choice of valuation does not affect the rate.  The only difference in cost between replacement and actual cash value is the cost of insuring the higher replacement cost values.

The limit of coverage you select serves as the maximum on the amount to be paid in the event of a loss.  In general, the insurance company has the option of repairing or replacing your property, subject to the limit of coverage for that property.

Building coverage

 Selecting an appropriate limit of coverage for your building is relatively straightforward.  It is basically the cost to rebuild a similar structure to the one that is being insured.  “Building” is defined in the policy but basically means the building or structure, as well as completed additions, fixtures, including outdoor furniture, permanently installed machinery and equipment and personal property that are used to maintain or service the building.

If not covered by other insurance, coverage is also extended to additions under construction, as well as alterations and repairs to the building, and materials, equipment, supplies, and temporary structures within 100’ of the described premise, which are being used for making additions, alterations, or repairs to the building or structure.

There are a number of ways to accurately determine the replacement cost value of a structure.  These include professional appraisals, original cost figures that are appropriately indexed as well as square footage multipliers.

Business Personal Property – Business personal property includes things such as furniture, fixtures, machinery, equipment, stock, and leased personal property that you have a contractual responsibility to insure (in general, when you lease a copier, computers, or similar equipment, you are responsible for providing insurance.)

A long list of items specifically are not covered.  The list includes, but is not limited to money, animals, automobiles, electronic data, the cost to restore or replace valuable documents, and property that is covered under another coverage form, in which it is more specifically described.  There are insurance coverages available to cover many of these items – but under different policy coverage forms.

More about valuation

 Blanket Limits – If you have multiple locations, a blanket limit of coverage should be considered.  With blanket coverage, a single limit of liability will apply for all types of property at all locations covered by the policy.  If, for example, you had four locations, all with $2million of business personal property, you could select a blanket limit of $8 million.  In the event of a catastrophe at any one location, you would have up to $8 million for that specific location.   Blanket limits can also be helpful in situations where inventory is moved between two or more locations.

Coinsurance and Agreed Value Provisions – Most property policies are written with a coinsurance clause.  A coinsurance clause requires you to insure your property to some specified percentage of its full value (typically 80%, 90%, or 100%).  If, at the time of loss, it is determined that the limit purchased is less than the limit required by the coinsurance clause, the loss recovery will be limited to that same percentage of loss as the ratio of the insurance amount carried to the insurance amount required.  In other words, you will be penalized for being underinsured.

An agreed value provision voids the coinsurance clause.  This usually requires a signed statement of property values, and sometimes, a recent property appraisal.  Regardless, an agreed value provision should be considered if available.

For your specific questions relating to adequately insuring any type of property, please contact your NAUGHT-NAUGHT AGENCY representative who will be happy to answer your questions and assist you.

January, 2015

Taken from ‘Commercial Insurance Update’ Feb., 2005