By Zach Focht, Assistant Vice President & Sales Manager
As a commercial property owner, have you ever met with your insurance broker to review your property insurance and upon seeing your building values thought that your insurance carrier was overvaluing your properties? I’ve heard it before, “There’s no way my building is worth that much!” While a property owner may be correct in that statement, they often misunderstand what the value being presented represents. The building in question might not sell for what is listed, but that’s not what the value the insurance carrier is presenting represents. Understanding what is being valued, how the value is determined, why it matters, and what they can do to accurately value their property is crucial for managing their risk.
What is Replacement Cost Value?
First, let’s start with what is being valued. The values an insurance carrier calculates are typically what’s known as replacement cost value (RCV). This differs from real estate market value. Replacement cost value is the cost to rebuild or replace the damaged property with new property of like kind and quality, without any deduction for depreciation, whereas real estate market value is the dollar amount a property owner can expect to sell the property for on the open market.
How is Replacement Cost Value Calculated?
Next, let’s explore how replacement cost value is calculated. Replacement cost uses several factors to calculate the appropriate value. Key factors include square footage, construction type, material costs, local labor costs, current codes, and debris removal. Most insurance carriers use cost-estimating software such as CoreLogic, Verisk, Marshall & Swift to name a few.
How to Avoid Underinsuring or Overinsuring Your Commercial Property
So, what’s the problem? When a commercial property owner relies solely on the insurance carrier to provide a building value estimate, there are potential flaws (this is a topic for another blog) in the process that can leave insureds either underinsuring or over insuring their property. If they are underinsured, they risk running out of coverage on a total loss. If they are over insured, they are paying for coverage limits they can never collect. Either way, it has the potential to cost an insured more than it should.
This leads to the next question; how can a property owner make sure their property is insured to the appropriate value? The answer lies in a simple answer: obtain an independent, professional replacement cost appraisal. A replacement cost (RC) appraisal is a professional estimate typically conducted by a certified appraiser. It usually includes an onsite visit where the appraiser collects the necessary data to back up their estimate. A comprehensive RC appraisal captures details that automated estimators tend to miss. The RC appraisal can be provided to an underwriter to substantiate property values and reduce the risk of over insuring or underinsuring. It is also a credible tool that supports values at the time of a claim.
Final Thoughts
Understanding the basics of replacement cost value and the importance of obtaining a professional replacement cost value appraisal can help property owners make sure they aren’t wasting premium or have an uncovered shortfall during reconstruction.
If you’re unsure whether your commercial property is insured to the right value, talk with your insurance advisor about whether a professional replacement cost appraisal makes sense.
