Did Your Insurance Carrier Value Your Property Correctly?
3 Ways Insurance Carriers Can Cover and Value a Property
For real estate companies, the value of properties is a big deal. However, value can be thought of in a few ways. There’s the value of what the building is worth in the marketplace. There’s the value of its cash flow. There’s also the value of its anticipated appreciation over time. But how do insurance companies measure value? The simple answer is its replacement cost, or rather, what it could cost to rebuild the building if there’s a loss.
Many property owners find this challenging since the replacement cost of a building in an insurance company’s eyes doesn’t always align with their value of the building. Depending on the market where a building is located, the market value of a property and the replacement cost can be very different.
A good broker will know there are ways to help real estate owners navigate this tricky terrain. Most insurance companies use a valuation tool called Marshall Swift Beck or MSB to help determine value. However, there are many variables that can make a significant impact in where that valuation comes out. There are cases where if the details aren’t entered correctly, a building that cost the developer $180 per square foot to build ends up coming out of an MSB report at $250 per square foot. That’s not good.
However, apart from tools like MSB, there are other factors brokers can utilize to make sure the goals of the owner are being met. There are three ways insurance carriers can cover and value a property depending on the owner’s goals:
1. Replacement Cost – The most traditional form of coverage
It estimates what the cost to rebuild the building would be and covers the building for that limit.
Example: If the building is estimated to have a replacement cost of $2.5M, the coverage on the building would be $2.5M. Any loss up to that limit is paid out in full up to the limit of coverage minus the deductible the owner chooses.
2. Actual Cash Value – Like replacement but with depreciation and less expensive
Example: If you take that same building that has a replacement cost of $2.5M and there’s a loss, the depreciation of the damaged portion of the building is factored into the payout for the loss. If you have a roof that’s estimated to cost $400,000 to replace but is 10 years old, the insurance company would factor in the depreciation over 10 years, subtract that amount from the $400,000, and then pay the resulting amount minus the deductible.
3. Stated Loss Limit – Doesn’t look at the cost to rebuild or depreciation
Stated loss limit is the most overlooked form of coverage. This coverage simply allows the building owner to state how much coverage they want for the building in the event of a loss. This is commonly used in situations where the market value of a building is lower than the replacement cost.
Example: If you take that building at $2.5M, the owner could say he/she only wants $1.5M of coverage. In the event of a loss, up to $1.5M can be paid out, but the payout is capped at that limit.
How is your broker helping you navigate the various forms of coverage and ensuring the coverage you have meets your goals? If you have questions about valuations and coverage forms, reach out to a member of our real estate ‘A’ Team.
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