Insuring to Value
One of the most frequent challenges I encounter as a Professional Insurance Expert with clients, is educating them about insuring a property with “replacement cost” value is not the same as “market value”. According to Investopedia.com, the definition for Total Insurable Value (TIV) “is the maximum dollar amount that will be paid out on an insured asset when deemed to be a constructive or actual total loss.” This definition outlines the maximum dollar amount needed to rebuild a property versus the current real estate “market value”.
A driving factor of the premium cost is the total insurable value of a dwelling. Generally, the higher the amount of dwelling or building coverage, the higher the insurance premium. Many customers, want to minimize the insurance cost, so they would like to reduce the building coverage. Many carriers no longer will allow this option as they would like to make sure the property is insured to current replacement cost to rebuild. I am able to create a customized reconstruction evaluation report that can include renovations. This can assist my customer, by not over insuring or under insuring the property.
Insuring to value requires property owners to discuss and review with their Insurance Agents the building reconstruction analysis every year to avoid over or underinsurance situation on a claim. Over insurance is when a building is higher than the real replacement cost. Owners are paying for additional premium, but the insurer will only pay for the true replacement cost to rebuild the property with the same functionality as before the loss. Many consumers believe that over insurance will pay that specified dollar amount, this is incorrect as it only pays up to the replacement cost of the claim. Underinsurance is when the property insurance policy has insufficient limits/coverage to repair or rebuild a structure. In other words, it does not cover the full value of a potential loss. The owner is left paying the difference out of pocket.
One of the largest most recent fires was a One Billion Dollar loss. This was the Marshall Fire from December 30, 2021. This even was a catastrophic loss where fire ambers went from one house to another, and entire subdivisions were destroyed. Due to large magnitude of the claim, this caused a ripple effect with contractors and building materials. The shortage of both contractors and building materials caused a very large increase to rebuild each dwelling. I have personally heard of rebuild costs up to $600 per square foot for homes impacted from this fire.
As a Licensed Insurance Professional, I suggest preparing a list of all the property improvements as well as out of pocket expenses made for your property. Ask your Insurance Agent to create a customized reconstruction report to confirm you have adequate “replacement cost” coverage. If you would like a third-party opinion, feel free to contact me.