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Common Question Friday – Questions I Hear Most From Insured

Today’s question is, “Why do I need to value my Building or Contents at replacement cost?”

We ask our clients to compile a fair amount of information and one of the pieces of information we ask for are property values.  There are three common responses we get when the replacement cost is not provided:

  • Appraised Value or Market Value, this is occurs more frequently with buildings, not so much contents.
  • Accounting value – The original value minus the amount the client has depreciated to date.
  • The value of the property they care about. Certain buildings or furniture they don’t care about and have no interest in insuring they leave it or say it is worthless.

We should really be insuring for the full replacement cost of everything or you could be penalized.  There are exceptions to this rule such as a large property schedule that is geographically spread or you have a product that has a large delta between replacement cost and selling price. Why should we value at full replacement cost?

  • You could have a coinsurance clause which penalizes you for not insuring to value. The insurance company will essentially penalize you proportionally to the amount you under-insured.
  • Even though your building might be old, the insurance company will pay to replace it, they don’t take into account the fact that your roof was 20 years old so you shouldn’t either.
  • Insurance companies base their premiums on the probable maximum loss. Just like you, they don’t believe most losses will be a complete loss but partial and they base their premium on that probable maximum loss.  That means the higher values you get the lower rate your rate should be.

Coinsurance should always be deleted from your policy, but I see enough policies and find plenty of prospects still have the coinsurance clause in their policy that I wouldn’t be surprised if you had it in your policy.

The valuation that your insurance company is using should be replacement cost but we do see other ways to do it, sometimes it makes sense but sometimes it doesn’t.  For instance, actual cash value (replacement cost minus depreciation), agreed value, and selling price (captures the difference between selling price and replacement cost, important when the delta is significant) are all examples of different ways that the insurance company could value your property and it can even be a mix.

The important thing is that you provide the values that match how the insurance company values your property if you suffer a loss.  The valuation method they use will be in the policy.

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