Category: Commercial Insurance

Accurately stating a building’s replacement cost or actual cash value with an adequate and current valuation has always been important for insureds. High inflation and supply chain constraints have further complicated matters making proper building valuation more important than ever.

The consequences of an undervalued building could have big implications for insureds, in the form of potentially large out-of-pocket expenses. Accurately stating a building’s replacement cost is important in order to help ensure that you-the insured have the level of protection you expect and need.

Common misperceptions with valuation
• Misperception #1: Purchase price or market value reflects an accurate value for a building’s replacement cost.
o The price of the building or current market value may not be an accurate reflection of its replacement cost.
• Misperception #2: Tax and mortgage costs show a building’s value.
o Assessed value for tax purposes can be vastly different from the cost of materials and labor to repair or replace building when it’s damaged.
o Similarly, appraisals performed to establish loans are typically performed at the beginning of the loan term and not updated until the financing program is renegotiated.
• Misperception #3: Keeping a valuation as is, despite inflation, will be fine.
o Property market dynamics vary, but if insured value does not increase over the course of a few years, there is a strong possibility it is undervalued. This dynamic is even more relevant in the current inflationary environment.
• Misperception #4: Buildings should be valued at the minimum amount required in the coinsurance clause.
o Coinsurance clauses in property policies allow for a buffer in the valuation, to help protect the policyholder in a situation where the value fluctuates over the policy period. Insuring a building at the minimum amount required by the coinsurance clause can increase the risk to the insured because using the minimum does not allow for common material and labor cost fluctuations.

Below is a simple example of how a valuation change can negatively affect a property owner:
• A commercial office building insured for $600,000 when the owner purchased it appreciates in value a few years later and suffers a total loss from a fire, costing $1M to replace. The property policy has scheduled limits of $600,000, meaning the insurer will pay a maximum amount of $600,000 for the claim (additional co-insurance penalties may apply). The building owner therefore faces at least $400,000 in out-of-pocket costs to rebuild.

It’s important that you-the insured knows that replacement costs have, in most instances, drastically increased in today’s market. Using values from prior years presents you-the insured with a significant risk. Our team of educated property professionals at Toedt Insurance Agency, LLC is here to help. We’ll help you use historical valuations, current local cost per square foot pricing and site specific details to arrive at an appropriate valuation. Contact Us Today!