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July / August 2012  Volume 23, Number 4        

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Property Valuation: How to Get It Right

Accurately valuing your property is the first step to ensuring effective coverage. If you place an overly high value on your property, you pay more premium than you need to. If you undervalue it, you may not have enough insurance to cover a loss.

Calculating the value of property for insurance purposes can be deceptively difficult. Organizations that use a do-it-yourself approach often make basic errors.

The first question to ask yourself is, what property should be insured? Obviously you will want to insure all buildings and essential structures your organization owns, including all the technology and energy infrastructure they contain. But take care not to overlook other structures such as fences, security systems and parking facilities. The basic property policy does not include coverage for debris removal and additional costs for constructing to meet current, stricter building codes—consider adding these coverages to avoid unexpected rebuilding costs.

The other major property category is business-personal property. This will include your inventory, office equipment, computers and maintenance equipment.

You can use many different valuation criteria for commercial properties, such as tax assessment valuation, accounting valuation and market worth. Using the purchase price of a property as a starting point is one common error — often it has little relation to replacement value.

For insurance purposes, only two valuation methods really matter:

Repair/replacement cost value (RR) — This represents what it would cost an owner to completely replace a facility with all new construction, business-personal property, etc.

Actual cash value (ACV), which is usually defined as replacement cost minus depreciation.

Most commercial property policies use RR. This approach means facilities are rebuilt with new materials after a loss. But some policies still carry ACV provisions. A policy using ACV valuation will generally cost less. Because the insurance company takes depreciation into consideration when paying the loss, it also means that your claim payout will be lower than with an RR policy and might not be enough to restore the business to its pre-loss position.

Calculating the RR value for insurance purposes can present a challenge. You can use yardsticks such as capitalized cost, value per square foot and inflation. However, these indexes may not be relevant for your specific property.

To avoid paying too much for your coverage, make sure any valuation you use bases the RR cost value only on property covered under the policy. In most cases this would exclude foundations, underground wiring, finance costs and land values.

Another common mistake is to include renovation or remodeling costs that add little or no value, or to include depreciation costs that have no impact on the RR level. Business owners also often neglect to regularly update their property valuations to reflect changing market conditions or updated inventories of business-personal property.

“Having an accurate valuation on the property you want to insure is the foundation of successful risk management,” says insurance broker Robert Banks. “Small mistakes can compound themselves when it comes to making a claim. Underinsurance can mean crucial delays in restoring companies to their pre-loss position and can have a huge impact on their financial health. For small companies especially, underinsurance in such cases can be devastating.”

For more information on obtaining the right kind and amount of insurance on your company’s property, please contact us. 

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In this issue:

This Just In...

Managing the Contingent Workforce

Understanding Surplus Lines

Property Valuation: How to Get It Right

Professional Appraisal Services Can Save Money



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