Friday, October 11, 2013

How Does the Insurance Company Calculate the Insurance Value of My Building or Home?

I was working with a client this week on setting the replacement cost value for his home. We had an interesting discussion which led me to an idea for a series of blogs on valuation. The information is definitely not exciting but is critical for making sure that you are insured accurately and I will explain what can happen when you are not insured correctly!

Case law has developed over the past one hundred years to determine valuation of property such as your home, rental property and commercial buildings. It even extends beyond structures to the value of your diamond ring, your collection of antiques and other personal property. The laws regarding valuation are set by the insurance code of each state. In most states the responsibility for setting the correct valuation for insurance rests with the owner. However, if you don’t know how valuation is calculated how can you make certain you are insuring your property correctly?

Most building values are calculated today with Replacement Cost. There are other values available and we will discuss later in the series but we will focus on replacement cost as it is the valuation that is most widely used. Replacement Cost Value (also known as RCV) is simply what it would take to rebuild or replace a structure today with current labor costs and modern building materials. (RCV never includes the value of land).

Replacement Cost Value (RCV) is rarely the same as the retail value of the structure (example: the value your home could sell for). Replacement Cost Value is a static value that represents the replacement value of the structure at one moment in time. If a structure falls out of replacement cost value it will be subject to coinsurance penalties that would diminish what the insurance would provide to rebuild the structure or replace in the event of a total loss.

A good insurance agent will carefully consider the building characteristics of your structure and will use a replacement cost value formula to arrive at a replacement cost for your structure. This value should always be considered a recommendation as the final decision on value will always lay with the owner of the structure. In next week’s blog I will discuss more on how the insurance carrier calculates replacement cost and introduce a couple of important insurance terms such as coinsurance which can greatly affect the final insurance settlement.

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