To get the right commercial property insurance, your client needs to make sure they understand the components of the coverage, and one of the most basic — and frequently misunderstood – concepts is around market value vs replacement cost.
The market value and replacement cost of a building are not the same thing. They are distinctly different concepts estimated using different criteria. Rarely are market value and replacement cost of a building identical. Market value is the estimated price at which the property would be sold on the open market between a willing buyer and a willing seller under all conditions for a fair sale. Replacement cost is the estimated cost to construct, at current prices, a building with equal utility to the building being appraised.
Most business properties insurance companies use two different methods for determining the value of property:
• Replacement cost refers to the amount it takes to replace damaged or destroyed property with new buildings, equipment and furnishings of equal quality and utility, using prices for labor, materials, overhead, profit and fees in effect at the time of the appraisal. The construction or replacement of the building uses modern materials and current methods, designs, and layouts. Replacement cost does not take into consideration improvements necessary to conform to changed building codes, demolition, debris removal, site accessibility, reuse of building components or services, overtime, bonuses for labor, abnormal soft costs, extraordinary fees, premiums for materials, and other various contingencies.
• Actual cash value (ACV), which is the replacement cost of property, less the accumulated depreciation for age and wear.
A delicate balancing act
Supply and demand for labor and materials affect replacement cost. Supply and demand for buildings impacts fair market value. When establishing the value of a company’s real property, building owners are often inclined to think in terms of real estate values. This means they want to insure the building for the current market price or fair market value. At Novita, we encourage our broker partners to consider insuring a client’s property for the replacement value, because replacement costs, impacted by natural disasters ranging from fire, flood, and storms, to quakes, have risen across most of the country. Don’t be caught short!
Keeping your clients on track
• Reevaluate a building’s value annually to make sure of adequate coverage; we recommend running a Marshall & Swift Valuation report. If your clients are like many small and medium size businesses, their company has probably changed since they first purchased a business property insurance policy. Maybe they’ve added to their space; perhaps they’ve moved or added another location. Regardless, pro brokers know an annual checkup is a good idea.
• Novita Insurance Solutions provides extended replacement costs of 110% or 125% of a building’s stated value to help with valuation changes within the year should a loss occur.
• Building Value affects property rates. Real property values have been particularly volatile in recent years; your clients should expect property premiums to be adjusted as this value increases or decreases.
• Some carriers may provide only 100% replacement cost and with an 80% or 90% co-insurance. Novita does not have a co-insurance clause in the policy.
• While some insurers might allow a client to insure for less than 100% of the replacement cost, that might not be the best idea. Depending on the business owners policy and insurance company, there might be a co-insurance penalty clause. If so, the client would have to pay a penalty if they under-report an insurance valuation or insure for less than 100% of replacement value.
• Our package also provides blanket coverage per location, and not per building.
Novita’s Replacement Cost Coverage, with no Co-Insurance, provides for repairs or to replace damaged property up to the stated limited on the policy. For additional information and specifics regarding our Commercial Lessor’s Risk Only (LRO) product, contact Novita Insurance, firstname.lastname@example.org. We’re here to help you get it right!