The basis of property valuation (how the property is valued) governs the amount recovered after a loss.
- Replacement cost is the cost of repairing or replacing damaged property with new material of similar kind and quality; and
- Actual cash value (ACV) is the replacement cost minus reasonable depreciation.
Property may also be valued according to market value, selling price (usually used for product inventory), and reproduction cost.
A physical appraisal and inventory is the starting point for establishing property values. Buildings should be appraised every five to seven years. Contents should be inventoried and valued more frequently. When buildings are expanded or significantly approved, or new furnishings are acquired, property values should be revised.
Tip: The value of your property changes with inflation, expansion and other factors.
Appraise your buildings and contents periodically to make sure your coverage continues to meet your needs.
The basis of valuation directly affects the amount of coverage purchased and the resulting premium. For example:
A church and its contents may have a replacement cost of $2 million. However, due to age and normal wear and tear, the same building and contents may have an actual cash value of $1.7 million.
Although a $2 million insurance policy costs more than a $1.7 million policy, most buyers choose the higher coverage because if there is a loss, they want to be able to replace old property with new.