Understanding Property Values

The recent increase in home values on the market has many homeowners looking at the value of their homes. One of the most important decisions to be made concerning your property insurance is the values that you set for the insurance policy. This is a topic that is challenging because some of the parties requiring insurance only require limits to protect their interests, not your interests. The question you need to ask yourself is straightforward. What amount of money do I expect to recover in event of a loss? The best place to begin is to define the most common valuations.

Replacement Cost - RC

This is the cost to replace the property with like kind and quality, with no regard to depreciation. What would it cost to rebuild the building from scratch with new materials? This seems like an easy question to answer until you factor in issues such as historic trim, any restrictions on the building by local zoning or historic commissions or your desire to replicate certain architectural features that are hard to replace or replicate. If your property has unique features, materials or intricate workmanship, you need to consider these in setting its value.

For contents be sure to consider fine arts and collectibles separately. A standard property policy would replace the frame and a blank canvas, not the artwork. You need a fine arts floater for this exposure.

Replacement cost coverage is required for Fannie Mae and Freddie Mac mortgages. Lack of replacement cost coverage can be an impediment to securing or refinancing a mortgage.

Functional Replacement Cost

Some carriers will offer functional replacement cost for a building they deem to be obsolete. If you have an older home or property, you may find this being offered. It essentially means that the insurer will replace damaged property with materials that are similar in function, but not like kind and quality of the original materials. With a partial loss this can mean loss of matching materials and a repair that is obvious. For a total loss your building would be replaced with the same area, but the construction materials may be very different.

Selling Price

This is easy – what did you pay for the property? If the property is used to secure a loan, the lender may require insurance at a limit that equals their interest in the property. If you are getting a good deal on the property, the selling price may be less than the replacement cost. The lender’s interest is protected, but you may have a gap. Most mortgages have provisions for the owner to carry replacement cost coverage, but the primary interest of the lender is that the value is high enough to protect their interests.

Market Price

Price of similar properties that are being sold to a willing buyer. Market price can be influenced by economic times, location, style of the property and other features that make the property easier or more difficult to sell. During an upswing in property prices, the market prices can be inflated by demand. Conversely in a period of lower demand, you may be able to buy a property for less than expected. Market price is more volatile than other valuations. The recent hot real estate market has inflated purchase prices.

Actual Cash Value - ACV

This is the value of your property adjusted for depreciation. Age, condition and upkeep all factor into this value. There are two variables, the starting point of the valuation, and the amount of depreciation applied. To understand this process, you must know both variables. The degree of maintenance and upkeep of the property can influence the depreciation. Some insurers apply a straight line depreciation that leaves older properties with limits that could be lower than expected. this valuation can also be applied to parts of your building such as the roof. For property with insurability concerns, ACV may be the only terms offered.

ACV is also being used by some insurers for roof coverage when they feel the roof is old or not in good condition.

ACV can be an issue if you are using Fannie or Freddie as your mortgage source. You may find that the mortgage holder will not accept any ACV coverage on the property they have a loan against.

Reconstruction Cost

This is a favorite of insurance companies. Since most property losses are partial losses, the cost to repair is matching new to old. If you have ever remodeled a room, you know that getting new cabinets to match up to existing walls and ceilings can be a time-consuming process. Many property insurers use this value as the default on the value estimators provided to their agents. This often becomes the replacement cost figure on your policy. It can be up to 30% higher than new construction costs.

What is the right number?

What do you need to recover? Lower valuations may save money on premiums, but if the amount you recover at time of loss is lessened by the valuation, it was probably not the best decision.

The Driehaus Difference

You are our customer. We want to understand your needs. If we and you both have a clear understanding of expectations, we can help you select the right values for your policy. This is not a process that can be done with an online chatbot or a scripted phone call. Reach out to us at 513-977-6860 or via www.driehausins.com to get a professional insurance consultation.