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Is your property insurance limit adequate?


If you own commercial property, a wide variety of policy options are available at different prices that cover an assortment of replacement or repair options at the time of loss. Knowing how much your property is worth and obtaining the insurance policy that both protects you and suits your financial needs is important.

The following are descriptions of common types of property valuations you may hear or read about. It is important that you seek the appropriate value from a professional or certified appraiser who is qualified to do so, and then provide this to your agent so that they can present the appropriate options for your consideration.

  • Replacement Cost (RC)
    Replacement Cost or reconstruction cost is a type of property valuation that covers the cost to replace or repair a building with materials of the same or comparable quality at the time of loss. Replacement Cost  does not include the value of any land and some improvements on it. Replacement Cost can increase significantly from year to year.  Each building has its own replacement cost based on its size, materials used and complexity, but general numbers are often discussed in cost per square foot. When a catastrophe effects many properties at once, replacement cost can rise substantially due to the scarcity of materials and labor.

    A replacement cost policy offers a good amount of financial protection in the case of a loss and is a  common choice of policyholders. It is usually more expensive than other types of coverage. A property owner must rebuild or replace the insured property to receive the full benefit of a Replacement Cost Valuation coverage.

  • Actual Cash Value (ACV)
    Actual Cash Value begins with the establishment of the replacement cost of  a property. However, under an Actual Cash Value policy there is a then a deduction taken to account for the depreciated value of the original property based on its age and materials used. Actual Cash Value policies generally have lower limits of insurance and lower premiums than Replacement Cost policies, and they may make more sense for those who may not rebuild or who wish to take on more of the risk of loss or repair in exchange for a lower premium.
  • Functional Replacement Cost (FRC)
    Another option for property valuation is Functional Replacement Cost Value. This type of valuation is used when a different type of building or materials would be desired at the time of a loss. The specific type of  building and materials to be used are agreed to by the owner and insurer and the limit of insurance chosen reflects this understanding.  For example, if a building is older and built with exotic hardwoods an owner may wish to utilize less expensive wood or composites to reduce the cost of repair and replacement at the time of a loss.   

    The most common reason for using Functional Replacement Cost valuation would be to reduce replacement and repair costs, thus  reducing insurable values and insurance premium costs. It may be a good option for properties that have expensive materials that are not necessary to the function of the property, or for buildings with intangible value that is not relevant to their desired commercial function.

  • Market Value
    Market Value describes the estimated amount that a property would sell for on the date of valuation. It is a term used by Real Estate professionals. It should rarely, if ever be considered for insurance valuation purposes. Several factors are considered when a property’s market value is appraised. These include the location of the property, capitalization rates, rent growth rate, the general state of the real estate market and more.

Which Type of Coverage Best Fits Your Needs?
The value of any piece of commercial property changes constantly. Knowing your property’s value and obtaining the policy that best suits your needs will safeguard your current and future assets. It is important that business owners obtain estimates from a reputable licensed or certified construction professional or appraiser before choosing a limit of insurance and a valuation basis which is adequate for their insurance policy. If the appropriate limit of insurance and valuation are not in place at the time of loss, a policyholder may suffer a coinsurance penalty and not have adequate insurance to repair or rebuild their property. 

Please talk with us if you have any concerns or questions. The terms and conditions of your insurance policy will dictate the coverages, limitations and exclusions that will apply at the time of loss.