Making the Most of Property Valuation
Note: A version of this article previously appeared in the Spring 2017 issue.
Insuring your clients’ property can require some careful questioning. You’re most likely familiar with the ACORD 140 Property application, but we have some tips to ensure you get all the information you need to successfully complete it.
Property is considered anything of value, including:
Real Property
- Land and the permanent structures on it, like buildings, outdoor fixtures, permanent machinery and equipment.
- When insuring restaurants, items that are not easily moved, such as booths and kitchen grills, are considered part of the building property, not business personal property.
- Solar panels permanently affixed to the roof of a building are typically considered to be part of the building value, not personal property.
Business Personal Property
- All other property that is not classified as real property and can be easily moved, such as computers, telephones and office furniture.
There are three different ways to determine the value of property (Valuation: RC, ACV or FRC):
- Replacement Cost (RC): The amount of money it takes to replace damaged or destroyed property with new buildings, equipment and furnishings.
- Actual Cash Value (ACV): The replacement cost of property, less the accumulated depreciation for age and wear.
- Functional Replacement Cost (FRC): Used occasionally for building values, this refers to how much it would cost to repair or replace the damaged building with less costly common construction materials and methods. This means the method or materials are functionally equivalent to obsolete, antique or custom construction used in the original construction of the building.
Often clients or agents try to insure a property for tax or market value. As construction costs increase and market values decrease, this can result in an underinsured property should a loss occur.
Determining Property Values
E2Value is the valuation tool recommended by WRC. It is an online tool that can be used to determine the value of personal, commercial and farm property.
When submitting a request to quote to WRC Agency, please include a copy of the E2Value valuation or something similar. If you do not have access to this tool, WRC Agency can assist you in obtaining a valuation.
Often carriers will return a submission for being undervalued or refuse to offer replacement cost coverage. If it does go through the underwriting process and the valuation is determined to be low when the inspection is done, the insured and agent may have to increase coverage after the policy has been written. This increases the cost of the insurance after the fact, which rarely makes the agent or the insured happy.
When determining the value of business personal property, review receipts and expenses. Take inventory of stock and estimate the average value of it on any given week. If there are antiques or other unique items, those should be appraised and the appraisal should be included in your submission.
If the business is seasonal in nature, consider adding a peak season endorsement, which provides extra protection if the business suffers a major loss during their specified season. For example, a flower shop may have a much larger inventory around Valentine’s Day.
Now that we know what property is, and how to value it, there are some other valuation considerations to review.
Co-insurance
Some insurers will allow the client to insure for less than 100% of the replacement cost, but this comes with some risks. If there is a co-insurance clause, the client will pay a penalty if the insurance valuation is underreported or you insure for less than 100% of the replacement value, depending on the coinsurance percentage chosen.
Loss Recovery Formula
Example 1:
An insured owns a restaurant for which he does a replacement cost estimation and the valuation is determined to be $300,000. He decides to insure the building at $250,000. A few months later the insured has a substantial fire loss and files a claim for $200,000.
| The replacement value of the building as determined by independent appraisal | $300,000 |
| Coinsurance requirement | 80% |
| Minimum coinsurance limit | $240,000 |
| Insured limit | $250,000 |
| Limit satisfies coinsurance minimum limit ($250,000/$300,000) | Yes |
| Reported loss | $200,000 |
| Less coinsurance penalty | $0 |
| Less deductible | $1,000 |
| Net Insurance Recovery | $199,000 |
Example 2:
The insured decides after four renewals that the building can remain insured at $250,000. It is still insured at replacement cost with the 80% coinsurance clause. He does not review his valuation to make sure the replacement cost estimate has not changed. Midway through the busy summer season, another fire damages most of the building.
| The replacement value of the building as determined by independent appraisal | $380,000 |
| Coinsurance requirement | 80% |
| Minimum coinsurance limit | $304,000 |
| Insured limit | $250,000 |
| Limit satisfies coinsurance minimum limit ($250,000/$304,000) | No |
| Reported loss | $150,000 |
| Less coinsurance penalty | 0.82 |
| Less deductible | $1,000 |
| Net Insurance Recovery | $122,000 |
Cause of Loss
There are three typical options for Cause of Loss: Special, Broad or Named Perils. Based on the ISO (Insurance Services Office Inc.) form, the difference in coverage is important. Often carriers create their own forms and are not using the ISO version, so this may not apply across all carriers. It is important to review each policy carefully.
Basic Cause of Loss Form (CP 10 10) provides coverage for:
- Fire
- Lightning
- Explosion
- Smoke
- Windstorm
- Hail
- Riot
- Civil commotion
- Aircraft
- Vehicles
- Vandalism
- Sprinkler leakage
- Sinkhole collapse
- Volcanic action
Broad Cause of Loss Form (CP 10 20) provides coverage for:
- The Basic Cause of Loss perils
- Falling objects
- Weight of snow, ice or sleet
- Water damage (in the form of leakage from appliances)
- Collapse from specified causes
Special Cause of Loss form (CP 10 30) provides coverage for:
- Any loss from any cause except those specifically excluded.
As you assist your client in quoting coverage, you can see that the type of valuation, coinsurance percentage option and cause of loss can vary greatly from policy to policy. It makes a significant difference in the type of coverage being purchased.
Contact WRC Agency today with any questions you have about property valuation.