Accurate insurance-to-value calculations are essential when it comes to business property coverage. Understand how ITV can help you have enough insurance coverage to cover a complete rebuild.
According to industry data, approximately 75% of commercial properties are underinsured by 40% or more.
When it’s time for you to purchase or renew your commercial property insurance, it’s important to have accurate insurance-to-value (ITV) calculations. ITV is the cost it takes to replace or repair if loss or damage occurs. By having an accurate estimation of what it would take to fully replace or restore insured property (in this instance a building), business owners can find a big difference in sufficient protection and avoiding penalties when covered loss occurs.
Understanding how ITV works allows business owners to avoid all too common inaccurate calculations. Poor valuations typically happen because:
Business owners should give commercial property valuations the attention they deserve. By understanding insurance-to-value and how to avoid undervaluing your property, you can protect your business from financial turmoil should a loss occur.
An accurate calculation of insurance-to-value (ITV) helps achieve a balanced ratio between the insurance coverage a business secures and the estimated value of its commercial property. This ensures sufficient protection in the event of property losses.
However, it’s important to note that property can have various assigned values, including:
Generally, it is recommended to use the replacement value of a property to decide ITV calculations. The replacement value can be estimated by:
While appraisals often require more time and resources than other property valuation methods, they are largely deemed to be the most thorough and accurate.
Apart from using replacement value estimates within ITV calculations, businesses should consider the following factors to determine correct property valuations:
Utilizing these features helps make sure your property valuation is up to date. This is imperative so that business owners can forgo ramifications that come from undervaluation.
Undervaluing a property and conducting inaccurate ITV calculations can have numerous ramifications for businesses. If your coverage is insufficient, you could face potentially significant out-of-pocket expenses to fully rebuild. This can lead to financial setbacks and in some cases, bankruptcy.
Undervaluing property can also lead to coinsurance penalties. Most commercial property insurance policies include coinsurance clauses, which encourage policyholders to carry reasonable and accurate amounts of coverage. Under a coinsurance clause, you are subject to a penalty—generally, a reduced payout—if your coverage limit is not at least equal to a predetermined percentage (e.g., 80%) of the value of your company’s property.
A coinsurance penalty restricts the maximum amount that can be recovered after a loss. To calculate the amount recoverable, the amount of insurance carried is divided by the amount of insurance required; this is then multiplied by the loss cost.
| Example (UNDERINSURANCE) | |
| When: | |
| The value of the property is: | $250,000 |
| The coinsurance percentage for it is: | 80% |
| The limit of insurance for it is: | $100,000 |
| The deductible is: | $250 |
| The amount of loss is: | $40,000 |
| Then: | |
| Step (1): | $250,000 x 80% = $200,000 (the minimum amount of insurance to meet your Coinsurance requirements) |
| Step (2): | $100,000 / $200,000 = .50 |
| Step (3): | $40,000 x .50 = $20,000 |
| Step (4): | The amount paid is not more than $19,750. The remaining $20,250 is not covered. |
Now that you know the dangers of undervaluing property, let’s look at how you can ensure accurate insurance-to-value calculations.
Third-party appraisals are highly regarded by insurers. They provide reassurance that experienced and objective professionals have conducted the calculations.
It is vital to work with a reputable appraiser who adheres to the Uniform Standards of Professional Appraisal Practice (USPAP) and the Code of Professional Ethics and Standards of Professional Practice from the Appraisal Institute. You can find a credible appraiser near you through the Appraisal Institute website.
There are additional industry resources such as reference guides and tools to help ensure accurate property valuations. The Marshall & Swift Valuation Service Cost Manual is a tool that is widely accepted by insurers. This resource features more than 30,000 component costs across 300 building occupancies that you can reference.
Make sure to compile a variety of property data from multiple qualified parties (e.g., accountants, contractors, real estate experts, risk managers, insurance professionals and chief financial officers) when making valuation decisions.
The value of a property is always changing, so updating property valuations on a regular basis is imperative.
Frequency for updates will depend on factors such as changing property exposures, altered operations, building upgrades, implementation of new technology or equipment, shifting market conditions and construction trends (e.g. inflated labor and material costs). By working closely with a trusted partner, you will be able to maintain property valuation updates and prevent coinsurance penalties.
Ultimately, it’s clear that correct property valuations are critical in securing adequate commercial property insurance. By better understanding how to decide accurate insurance-to-value calculations, businesses can stay protected when covered damage happens and avoid potential coinsurance penalties. For additional insurance guidance and solutions, reach out to a trusted advisor.
