My building is not worth that amount!
Because the insurance premium you pay is a function of the insured value, many policyholders question how the insurance companies come up with the values used on their policies. When discussing the insured value on any building it is important to understand all the different types of values that are associated with that building:
- Market value: the market value is the first thing people think of when discussing the value of their property. How much can I get for this property if I were to put it up for sale today? As we learned during the recent mortgage crisis, the market value can sometimes be volatile and therefore isn’t a reliable metric for insurance purposes.
- Assessed value: like the market value, the assessed value is often top of mind when a policyholder thinks about the value of their property. The assessed value is the property value local municipalities use to calculate your tax levy. Assessed value is also not a very good metric to use for insurance purposes because there are a lot of factors that go into the assessed value (including the market value) that make it unreliable. Additionally, many municipalities are notorious for taking a long time to update the assessed values. Time between full revaluations is usually measured in decades instead of years.
- Actual cash value: also known a depreciated value is sometimes used in the insurance industry, but when calculating the value of your building it is not the best valuation to use for the policyholder: let’s say you have a $10,000 roof that has a 30-year lifespan. If that roof is currently 15 or 20 years old you, using the actual cash value, the most you will be able to collect on a claim is $5,000 or $3,333 respectively – minus your deductible.
- Replacement cost value: this valuation is the most common valuation used for the most homeowner’s and business owner’s policies. The replacement cost valuation is meant to indemnify the insured for the full replacement cost of their property (up to the policy limits.) Most policyholders expect their insurance policy will pay the full value of their claim minus the deductible. If they have a claim on that same $10,000 roof, they want to be able to replace their roof without having to cover most of the claim out of pocket.
When calculating the insured value of the building, insurance companies calculate the cost to replace the building with like kind materials. In Rhode Island, many of the homes were built in the early 1900s so the types of materials used to construct these building is significantly more expensive that the materials used in modern construction. While you may be okay with completely rebuilding using modern construction materials, if you have a partial loss you probably want to have your building repaired with like kind materials so the repaired property looks right.
Why it is important to insure your building to the full replacement cost:
Even after they realize the different types of valuations, many policyholders insist that they don’t want to insure their building to the full replacement cost. They may only be concerned with having enough coverage to satisfy their mortgage amount or a value they think they are comfortable getting if the building is a complete loss. This decision should not be taken lightly and policyholders should discuss their intentions with their insurance agent. Policies are available that can be tailored to your needs, however (for most risks) the savings realized by using specialized valuations are not worth the reduction in coverage. Most policyholders are much better off just insuring the property to the full replacement cost instead of going through the hassle of writing a specialized policy and then dealing with the claims adjuster if a loss does occur.
Another important factor to consider is what coinsurance requirements are included in your policy. No matter if your policy is written at replacement cost or actual cost value, you are required by the policy contract to insure the building to within a specified percentage of what the true replacement cost or actual cost of the building really is. Typically, if your building is not insured to within 80% of the true value, you could face a coinsurance penalty when you attempt to file a claim.
A coinsurance penalty is the amount an insurance company will penalize you if you did not insure your property to its full value. So, if you have a building that has a true replacement cost of $250,000 with 80% coinsurance, you must insure the building to at least $200,000 to avoid that penalty. If the insured value is less than $200,000 you will be penalized the percentage that your building was under insured: So, if your building was only insured to $150,000 you would be penalized 75% on your claim (what you did have/what you should have had: $150,000/$200,000 = 75%.) In this scenario your $10,000 roof claim would only pay $7,500 minus the deductible ($10,000 x 75% = $7,500.)
How to calculate the Replacement Cost of your building:
While there are many online tools available to calculate the replacement cost of your building, the best way is to ask your independent insurance agent. Your insurance agent understands the methods the insurance companies use to calculate the correct value of your property and has access to the same tools that the companies use. If you are unsure if your building is insured to the correct value, give Shove Insurance a call today and we will be happy to evaluate your coverage and help you avoid an unexpected penalty if you happen to experience a loss.