Real Property Valuation

There are different types of valuation for Real Property coverage, here is a summary of some common options:

1) Replacement Cost – Replacement Cost valuation pays out the lesser of the limit of the policy, the cost to repair or replace the property with like kind and quality, or the amount actually expended to repair or replace the property. The policy will pay out Actual Cash Value until the property is actually repaired or replaced, assuming that is done as soon as reasonably possible, at which time the balance will be paid for the Replacement Cost value.
 
Replacement Cost value has a coinsurance clause that states if the value of the property at the time of loss times the coinsurance percentage on the Declarations page of the policy is greater than the limit of insurance, then the policy will not pay the full amount of the loss.  The intent of the coinsurance clause is to encourage the policyholder to insure to value.
 
2) Actual Cash Value – This is Replacement Cost less depreciation, or fair market value.  Actual Cash Value also has a coinsurance clause.

3) Functional valuation- Functional Valuation is most commonly seen on older buildings with unique construction features that can not be easily replaced.  Insuring these buildings at Replacement Cost can be very expensive for the insured since a higher limit – and premium - would be necessary to cover the cost of the unique construction.  There is no coinsurance clause on this valuation.  In the event of damage to the property, and depending on whether it can be repaired or is a total loss, the policy pays out in one of the following ways: 1) the limit, 2) the cost to replace the property with less a costly building that is functionally equivalent, 3) the cost to repair or replace in the same style with less costly materials, 4) the market value of the building.

4) Agreed Value- Agreed value on the property means that there is no coinsurance requirement and the insured and insurer agree to the amount that would be paid out in the event of a total loss, regardless of the value of the property at that time.  This valuation is a good option in times of high inflation when property value may rise during policy term and leave insured subject to coinsurance penalty, and also on unique or old buildings that are difficult to value.

Choosing the correct valuation option for Real Property coverage depends on the insured, agent and underwriter.  For example, if a valuation report (Marshall Swift) indicates a limit higher than what the insured is willing to pay for, then underwriting may allow them to keep the lower limit and change valuation from Replacement Cost to Actual Cash Value allowing a lower limit to satisfy the coinsurance requirement.  Another common example is on buildings that are more than 30 years old.  If underwriting feels the building is not properly maintained with updates on the roof, wiring, heating or plumbing, they may require the valuation be changed from RC to ACV.

In the event of loss or damage to the property, the carrier will pay either the value of the lost/damaged property or the cost to repair or place it, or will take the property at an agreed or appraised value, or repair/rebuild/replace the property with like kind and quality.  The value of the property at the time of loss is determined as part of the claims handling process by a field adjuster and engineers in accordance with the valuation option indicated on the policy.  If the insured disagrees with the value of the property as determined by the adjuster, they can send a written request to the carrier for an appraisal and the insured and the insurance carrier each select an appraiser to assess the value of the property.  If the two appraisers do not agree then they submit their results to an umpire who makes a final decision between the two reports.