At Burton & Company, we encourage experiences! We step outside the box, engage our clients and ask questions to discover what matters most to them. So they know we have their backs. As an insurance agent, a large part of the profession is fielding and asking questions. Without a doubt, the question I hear most often is, “Why are my Costs So High?” This is a legitimate question and certainly one that is very important. Especially today when the simple fact is how and where we spend our money is at a premium. That choice can make the difference in paying the bills, planning for our financial futures, providing for our families and living the lives we dream of having. So, I have decided to dedicate myself to seeking out these elusive answers to what I know are complex questions. Over the coming months, I will be exploring different industries and lines of insurance to understand what the reasons are for these costs and what are the things that matter to you. My goal is to provide insurance insights to your questions and locate the resources you need to help you be successful. I look forward to this journey and ask you to please comment, follow, like, subscribe and share.
Whether you are purchasing a home, starting a new business or moving to a new location. You’re guaranteed to make several decisions. Near the top of that list will be how much insurance coverage does my home or office need and where do I find the correct value. If you are like me and take all questions straight to Google and search for a property value. You are most likely going to see Market Value and Replacement Cost Value. Which one should you use, are they different and does it matter? To put it simply, they are different and each will influence your evaluation a little differently. Let’s look at both.
First, Market Value can be used interchangeably with the terms open market value, fair market value or fair value. Market Value is the estimated amount that a property would sell for on the date of valuation. This valuation includes any land in a commercial/personal property. There are various factors considered when a property’s market value is appraised. These factors can NOT be influenced by the buyer, seller or appraiser. This includes the location of the property, capitalization rates, rent growth rate, the general state of the real estate market and others. Market Value is most often used when buying or selling a property. However, you may also see it come into play when determining the type of insurance policy to place on a property or the amount of compensation for a loss.
Now that we know Market Value considers a wide array of market conditions, how does this differ from Replacement Cost? Replacement Cost is a form of insurance that covers the cost to replace or repair a building with materials of the same or comparable quality. A Replacement Cost evaluation is used in calculating a valuation for your property. Unlike the Market Value, which is not considered by insurance companies typically. Replacement Cost policies do not include the value of any land (unlike the Market Value) and are determined based on the amount needed to hire contractors and purchase materials to repair a building or to construct a replacement. Usually, the Replacement Cost of a commercial/personal property should be lower than its Market Value. The Replacement Cost should only take building materials and labor into consideration when determining compensation. But, the cost of materials and labor can fluctuate (i.e. a large increase in cost on the lumber market), combined with the numerous factors that contribute to Market Value (i.e. recession or being in a buyers’ market) makes it possible for the Replacement Cost of a property to be higher than its Market Value. Traditional Replacement Cost insurance (Broad & Special forms) covers losses due to fire, lightning, wind, hail explosion, smoke, civil commotions and vehicles that damage your property. It is always wise to ask your agent what coverages you have if there is something that you question. One of the most important aspects of purchasing property insurance is making sure that you have purchased enough coverage to adequately be protected.
Actual Cash Value
It is worth mentioning that there is another option besides Replacement Cost and that is Actual Cash Value or ACV. ACV policies function in a comparable way to Replacement Cost in that it covers the cost to replace or repair a property. Within an Actual Cash Value policy, there is a deduction in compensation to account for. That is the depreciated value of the original property. A property covered under an Actual Cash Value policy will be rebuilt or repaired using modern construction techniques and materials. The difference between this cost and the depreciated value (properties usually depreciate at 1% per year) of the original property is only covered under a Replacement Cost policy and NOT an ACV policy. This is something you should consider when deciding how much risk to retain and what you have budgeted to spend.
Most property policies include a coinsurance clause, which requires you to share the cost of covered services up to a percentage of the ACV of the property. This will allow you to receive full coverage for your losses. (in the case of Replacement Cost) It is important to recognize that should you buy adequate coverage for the property or you may be obligated to pay a percentage of all losses.
What is best for you?
The value of any piece of property changes continuously. Being aware of your property’s value and obtaining the policy that best suits your needs will protect your current and future assets. Contact Burton & Company to evaluate your property’s current value and learn more about which type of policy is best for you. I hope you enjoyed this post and encourage you to please comment, follow, like, subscribe and share anything you find helpful on @BurtonandCoIns If you have more questions or would like to speak with one of our specialists, please contact one of our Burton & Company locations. Check back soon for newer and exciting content! Until next time…