Property Valuation – Insurance Valuation

I was cleaning out some file drawers last week and found a document that I must have placed in the file when I first started in the insurance business, 30 years ago.

It’s from Millers Mutual Insurance Company. The paper describes the different ways that property can be valued. No author is listed, so I cannot give proper attribution. I am borrowing (and updating) the ideas here.

The paper describes a commercial property.

Original Cost: $1,500,000

Fair Market Value: $2,500,000

Orderly Liquidation Value: $1,500,000

Forced Liquidation Value: $750,000

Replacement Cost: $4,000,000

Net Book Value: $500,000

Actual Cash Value: $3,000,000 (The article is so old it calls this “insurable value.”)

To the above we could add “Functional Replacement Cost,” the cost to replace the structure to its function.

Let’s say that is $3,500,000.

Insurance is concerned with Replacement Cost (the cost to replace using current cost of materials and labor), Actual Cash Value (the replacement cost minus depreciation), and functional replacement cost.

Original Cost, Market Value, Liquidation Value, and Book Value are of no importance in 99.9% of property insurance policies.

Most property insurance policies are written to Replacement Cost.

When I started in the insurance business, I recall arguing with an underwriter who would not write replacement cost insurance. He said it was against the principles of insurance, as it put an insured at a place better off from where he was the day before the fire.

I recall hearing that some Western state banned replacement cost coverage.

Talk with your insurance advisor about how the property on your insurance is valued. Consider what you would do if your building was destroyed. Share your plans with your advisor so she can structure your policy correctly.