If there is one benefit from the real estate bust that occurred over the past year and a half, it is that the cost for replacing your home of business may have gone down.   While it would affect your total assets, it could drive your property insurance costs down.

There are typically three different ways to look at property value:

  1. Market value - the amount of money you can expect to receive when selling the property under the current market conditions.
  2. Replacement value – the cost to replace any of the structures should a total loss occur.
  3. Use value – the amount of income your company would lose if the structure became uninhabitable or unusable for a set period.

Property insurance is based on the value of the structures on your property and the cost to replace them.  You might ask h0w this is different than the purchase price or estimated selling price?  The important factor is the value of the land.  Land will not burn up, blow away and with the exception of erosion if you are on the bank of a stream or lake will not be lost in a flood, so you have a foundation to rebuild on, or funds from a sale of the land.

With the implosion of the real estate market, it is possible that the value of your property has dropped, and you may be over insuring your property.   This could have occurred because the property was improperly valued initially (based on market value rather than replacement value), established an incorrect modifier to determine replacement value, or incorrectly estimating inflation modifiers when renewing the insurance programs over the course of several years.

In order to be sure that you are being properly covered, I suggest you have an appraisal completed on your property.  The small cost of having a certified commercial property appraiser can be recouped in reduced premiums, and proper coverage in the even there is a claim.

The property appraiser will be able to provide information on the Market and Replacement values.  These values go directly towards the true value of the property as well as the repair or replacement costs associated with to the structure.

The Usage value is something that would be identified by your organization and depending on the role of the structure can be part of your business continuity program, or a separate policy/program to replace rental income generated from the structure if the building was leased to others.

Please note that Personal Property such as copiers, computers, phones, and desks  is different from Real Property that the basic property package coverage and, while it may be rolled into the entire package, requires a separate declared value.

Once you have completed a certified appraisal, you will probably want to continue with this practice every 3 – 5 years.  This will make sure your coverage keeps pace with actual costs, and reduce the risk negative impact from co-insurance clauses in the event of incorrectly valuing the replacement costs to low.