How is Your Bank’s Property Valued By Your Insurance?

Property valuation can mean several different things:

  • real estate value (the price at which you could sell)
  • tax assessment value
  • replacement cost
  • book value (purchase price minus accounting depreciation)
  • actual cash value (replacement cost minus usage depreciation)

Two forms of valuation are commonly used in property insurance. The traditional (meaning old-fashioned) valuation is “actual cash value.” The term is defined by most policies as replacement cost minus depreciation. In some states, you must also consider market value in the determination of the actual cash value of property.

Actual Cash Value – Building Example

Suppose that a thirty-year-old building would cost $1.5 million to replace. The structure is well-maintained and in no way obsolete. The roof was replaced last year. Plumbing and electrical have been updated recently. A fire destroys the building.

The insurance company adjuster determines that 20% depreciation is called for. She issues a check to the insured for $1.5 million less 20%, minus the deductible.

Actual Cash Value – Personal Property Example

Suppose that a pipe in the ceiling of a bank branch office bursts, damaging a conference table, chairs, audio-visual equipment, and several computers. The cost to replace the items is $35K.

The insurance company adjuster determines that the equipment was obsolete and the furniture was in poor repair. Based on photographs and interviews, it is determined that 60% depreciation is in order. You are offered $14K (40% of $35K), less your deductible.

Replacement cost valuation of property uses the actual cost of buying a replacement item or rebuilding the structure. If the building burned to the ground, how much would it cost to rebuild with the current cost of materials and labor?

Generally, you’ll want your insurance to be written on a replacement cost basis. The policy maker agrees to pay the full cost of reconstruction without deduction for depreciation.

Carry actual cash value coverage only when you would not replace a building after a fire—a relatively rare plan.

Personal property can also be valued at replacement cost or based on its actual cash value. Again, in most cases, replacement cost is the most desirable valuation.

The above is an excerpt from “Simmonds on Bank Insurance.”  For a free copy go to