At Burton & Company, we encourage experiences! We step outside of the box, engage our clients, and ask questions to discover what matters most to them. We want our clients to know we have their backs. As an insurance agent, a large part of the profession is fielding and asking the right 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 fact is that 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.
As a result, I have decided to dedicate myself to seeking out these elusive answers, to what often seem like complex questions. In the coming months, I will be exploring different industries and lines of insurance to understand what the reasons are for these costs, as well as what things matter most to you. My goal is to provide insurance insights and locate the resources needed to help you reach your goals of success. 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 have to make several pressing decisions. At the top of that list will be how much insurance coverage does your home or office need, and where do you go to find the correct value? If you are like me, I take all of my greatest concerns straight to Google. When searching for a property value you are most likely going to see Market Value and Replacement Cost Value. Which leads to more inevitable questions of which one to use, their variance, and does it matter? To put it simply, they are different, and each will influence your evaluation a bit. Let’s take a look at both.
Market Value
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 numerous 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 more. 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.
Replacement Cost
Now that we know Market Value considers an extensive array of market conditions, how does it 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 typically considered by insurance companies, Replacement Cost policies do not include the value of any land and are determined based on the amount needed to hire contractors, purchase materials, 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. However, the cost of materials and labor can fluctuate (i.e. a large increase in cost on the lumber market), combined with the countless other 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) cover losses due to fire, lightning, wind, hail explosion, smoke, civil commotions, and vehicles that damage your property. If you are unsure of your specific policy, always ask your agent what coverages you have. One of the most important aspects of purchasing property insurance is making sure that you purchase enough coverage to be properly protected.
Actual Cash Value
Actual Cash Value, or ACV, is another option to the previously mentioned Replacement Cost. ACV policies and Replacement Cost are similar in function, as they both cover the cost to replace or repair a property. ACV policies differ due to deductions in compensation that must be accounted for. More simply put, 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) is that the original property is only covered under a Replacement Cost policy and NOT an ACV policy. This is something to be considered when determining budget and how much risk to retain.
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 you should 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 right for you. I hope you enjoyed this post and I 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 new and exciting content! Until next time…
