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3 Common Myths About Building Values

Determining the amount that a commercial property should be insured for is a matter of opinion.  Is it the agents’ job?  The underwriter?  The broker? The insured? Unfortunately, many insured’s do not have any idea where to start with determining a value that is accurate. We have to be ready to guide them. A good place to start is to learn the myths that are commonly believed, as many insured’s have heard of these.  Here are the three most common myths about building values.

  1. The market value is the same as insurance value – Often times when discussing building values with a client they will mention market value, or what they paid for their building. It is very rare that these two values are the same. Market value considers location, land value, and market trends whereas insurance value is interested in what it will take to rebuild.
  2. The amount on the declaration page is the amount received – Most insureds believe that if there is an amount on the declaration page, they will receive this amount. This may not be the case, as they may only get actual cash value (replacement cost minus depreciation) depending on how the policy reads.  If you do write an actual cash value policy, make sure your insured knows what this means.  If you are unsure the building value is correct, then adding an extended replacement cost value (ERC or RCV) clause is the right answer.
  3. The responsibility of determining building value is on the insurance agent – Luckily for the insured, there are professionals that can survey their building and determine its replacement cost. This is the best option if they are concerned about making sure the building is adequately insured. While we have tools to be able to calculate a number, it is limited and may not be accurate.

Making sure your clients’ commercial building is insured properly can be stressful. Explain the difference between market value and insurance value to your client.  Let them know all of the different options the policy offers and recommend that they have a professional determine the value. Not only will this help with client retention, but it will reduce your E&O exposure as well.

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