INDUSTRY INSIGHT
INSURANCE
“But I would never be able to sell my building for the
amount it’s insured for!”
F
rom both homeowners and commercial property owners, we in the
insurance industry hear this complaint a lot. And, admittedly, the policy
your insurance carrier sent you probably doesn’t do much to clarify
where the limits listed came from.
So, let’s break it down.
There are essentially two types of property coverage: Replacement Cost
and Actual Cash Value. Knowing which one you have (and what these terms
mean) could save you a ton of hassle in the event of a claim.
The less expensive of the two options,
Actual Cash Value (or ACV), covers
your property at a rate that factors in
depreciation. As a piece of property gets
older, its value goes down. So if an accident
were to destroy that property, the amount your insurance carrier would give
you to settle that claim lessens with time.
ACV for building coverage is rare, but it is how most carriers cover your
contents. Televisions, golf clubs, computers, etc. – in the event of a claim, these
are all typically valued according to how much it would take to replace them
with contents of similar kind and quality, minus depreciation.
Needless to say, covering your home or business property itself on such a
basis might save you money now in premium payments, but it could end up
costing you a lot more if something unfortunate happens.
Why?
Well, let’s look at Replacement Cost.
Replacement Cost, on the other hand, is based simply on the amount it
would take to replace what was lost. No depreciation. Just a one-for-one
deal. This is how most standard policies cover your home or commercial
property.
For an example, let’s say a building burns down. While that building
might only sell for around $100,000 in the current market, it’s insured on a
Replacement Cost basis and it would cost $200,000 to completely rebuild it,
brick-by-brick.
So, how much is that building covered for?
That’s right – $200,000.
And you might say to yourself, “I would never rebuild my house if it burnt
down – I would just buy another house. Why pay more for Replacement Cost?”
Fair question.
But, what if the fire only destroyed the roof of that building?
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The people living there wouldn’t have much choice—they’d have to get
that roof replaced. And with ACV coverage, their claim settlement would take
into account the depreciation of that roof before it was destroyed.
That means a chunk (maybe even a hefty chunk) of the cost to replace that
roof would be coming out of their own pockets.
And this is why we always strongly suggest Replacement Cost to our
clients. Only in a few very special cases does it make sense to instead go with
Actual Cash Value.
Here are three simple steps to make sure you’re covered correctly:
1 Check your policy to see which basis your dwelling or commercial
property is covered under. Replacement Cost or Actual Cash Value?
2 If Actual Cash Value, ask yourself if you’re comfortable having your
building’s covered value decrease with age.
3 If Replacement Cost, make sure the numbers are right. Ask a contractor,
or ask us to run a quick, obligation-free calculation for you at
RuppFiore.com/ReplacementCostRequest.
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This Industry Insight was written by CANDICE FIORE SCHAFFER, a licensed
insurance agent able to sell all types of insurance products including personal,
business, life, and health. Her main focus is on business insurance and the personal
insurance for those business owners. Candice has been with Rupp-Fiore Insurance
since 1990. She earned her bachelor’s degree at the University of Pittsburgh and
a master’s degree in Risk Management/Insurance from Florida State University.
Through the National Alliance of Insurance Education, Candice has also earned the
Certified Insurance Counselor (CIC) and Certified Risk Manager (CRM) designations.
GREENSBURG SALEM
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S PRI NG 2018 7