Which valuation is the best choice to determine how to insurance your property? Keep reading to find out!
Commercial and Private properties can be covered in a variety of ways, and a number of factors can determine whether your property’s value goes up or down each year. Knowing how much your property is worth and obtaining the insurance policy that both protects you and suits your financial needs is important. The following are descriptions of common settlement options which will help you determine which policy type is best suited for your property.
Simply put, market value describes the estimated amount that a property would sell for on the date of valuation. The land which the property is on (in insurance terms referred to as ‘premises’) is also a part of its market value. The term market value can be used interchangeably with open market value, fair market value or fair value.
Market value is most often used when buying or selling a property. However, it may also be examined when determining the type of insurance policy to place on a property, or the amount of compensation in the case of a loss.
Replacement or reconstruction cost is a type of insurance that covers the cost to replace or repair a building with materials of the same or comparable quality. For the purposes of coverage—and unlike market value—replacement cost policies do not include the value of any land and is determined based on the amount needed to hire contractors and purchase materials to repair a building or construct a replacement.
Actual Cash Value
Actual cash value policies function in a similar way to replacement cost in that it covers the cost to replace or repair a property. However, under an actual cash value policy there is a deduction in compensation to account for the depreciated value of the original property.
A property covered under an actual cash value policy will be rebuilt or repaired using modern construction techniques and materials. The difference between this cost and the depreciated value of the original property is only covered under a replacement cost policy and not actual cash value.
Actual cash value policies generally have lower premiums than replacement cost plans, and they may make more sense for particular types of properties. For example, a store located in a very old building in a popular urban environment will not depreciate as quickly as a new office building located in a business park. The store is more location-sensitive and does not require a specific type of building to operate, so an actual cash value policy and its lower premiums may make more financial sense than a replacement cost plan.
Functional Replacement Cost
Another settlement option for property coverage is functional replacement cost. This type of policy is used when a functionally equivalent building can be found to replace the original property at a lower cost than building a replacement. A building’s functional replacement cost is lower than the replacement cost, which results in a reduction in the amount of coverage and correspondingly smaller premiums.
Which Type of Coverage Best Fits Your Needs?
The value of any piece of commercial or private property changes constantly. Knowing your property’s value and obtaining the policy that best suits your needs will safeguard your current and future assets. Contact THZ Insurance today to speak with an agent and learn more about which type of policy is best for you.