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Commercial Building Valuation Basics
Bulletin – Monday, July 21, 2008
The traditional approach to insuring property is Actual Cash Value (ACV) as found in the ISO Commercial Building and Personal Property coverage form. The definition of ACV is “replacement cost minus depreciation”. That means if a claim occurs, the insurance company will determine the value of the property at the time of loss. ISO property forms are based on ACV, unless optional coverage valuations are selected and shown on the declarations page of the policy.
While the basic coverage form starts with the ACV valuation loss settlement form, there are three popular alternative valuations that can be used when insuring buildings - agreed value, replacement cost and functional building valuation.
The agreed value provision is a unique approach, as the company and the insured agree to the value of the property at the time the policy is issued and not at the time of loss. Unless endorsed, the Coinsurance Additional Condition does not apply. Most companies will require a recent certified appraisal to verify building values.
Replacement cost (RC) is the most popular property valuation form because it provides coverage that will repair or replace the insured’s property without depreciation, or in other words, “new for old”.
Functional Replacement Cost (FRC) building valuation is a great alternative to replacement cost when insuring older buildings. This type of valuation is perfect for buildings with unique construction features that do not add to the building’s usefulness, such as unique trims or ornate woodwork that would cause the replacement cost of a building to be extremely high. The FRC form permits replacement of materials that perform the same function as the damaged material without having to repair or replace the historical or ornate qualities of the damaged materials. Another unique feature to this type of valuation is that the Coinsurance Additional Condition found in the Building and Personal Property Coverage form does not apply.
Properly estimating the property limit for any of the valuations shown above is an essential service an insurance producer provides. When insuring buildings or business personal property, there are a number of tools available to do this. Appraisal companies are an excellent resource. Cost estimators, based on labor, materials, installed components, and territory are another aid in developing a building’s insurable value.
While the basic coverage form starts with the ACV valuation loss settlement form, there are three popular alternative valuations that can be used when insuring buildings - agreed value, replacement cost and functional building valuation.
The agreed value provision is a unique approach, as the company and the insured agree to the value of the property at the time the policy is issued and not at the time of loss. Unless endorsed, the Coinsurance Additional Condition does not apply. Most companies will require a recent certified appraisal to verify building values.
Replacement cost (RC) is the most popular property valuation form because it provides coverage that will repair or replace the insured’s property without depreciation, or in other words, “new for old”.
Functional Replacement Cost (FRC) building valuation is a great alternative to replacement cost when insuring older buildings. This type of valuation is perfect for buildings with unique construction features that do not add to the building’s usefulness, such as unique trims or ornate woodwork that would cause the replacement cost of a building to be extremely high. The FRC form permits replacement of materials that perform the same function as the damaged material without having to repair or replace the historical or ornate qualities of the damaged materials. Another unique feature to this type of valuation is that the Coinsurance Additional Condition found in the Building and Personal Property Coverage form does not apply.
Properly estimating the property limit for any of the valuations shown above is an essential service an insurance producer provides. When insuring buildings or business personal property, there are a number of tools available to do this. Appraisal companies are an excellent resource. Cost estimators, based on labor, materials, installed components, and territory are another aid in developing a building’s insurable value.