A recent fire that severely damaged a local restaurant brought to light the issues with valuation clauses amongst various other insurance coverage considerations that consumers often overlook until it’s too late. Whether you are a business owner or home owner the coverage considerations are the same.
On a Replacement Cost Valuation form, the insurance company is required to repair or replace the insured property up to the limit on the policy. The carrier will repair or replace new for old. In this case of the restaurant, they had a building that was built in various stages over a 60-70-year period. Some of the building was new this year, some was about 70 years old, and other sections ages were somewhere in-between. With Replacement Cost Valuation the insured is able to re-build without any worry of receiving too little to be able to repair the building. As long as their limit was sufficient, they will be able to re-build.
On an Actual Cash Value Valuation basis, the carrier starts with the Replacement Cost at the time of the loss and then deducts depreciation. Think about this for a minute. What is the proper depreciation on a building that was originally built 70 years ago and added on to over time? Can you come up with a worse sticking point to have to negotiate at the time of the loss?
For discussion purposes lets assume the building had met 50% of its useable life. The restaurant building in this case was insured for $1,000,000. We will assume the $1,000,000 also reflects the actual cost to replace it for discussion purposes. The loss from the fire is $400,000 to repair. The insured will only receive 50% of the $400,000 repair bill due to the ACV valuation clause. So now they get $200,000 to repair the building and have to come up with the other $200,000 in costs out of pocket.
This claim brings to light the importance of choosing and paying for Replacement Cost Valuation and the dangers of buying Actual Cash Value valuation policies in order to save premium dollars. I doubt very much the premium savings would have come anywhere near the out pocket costs the insured must now to come up with in order to re-build their business.
This loss scenario is over simplified for discussion purposes. There are many other coverage considerations including making sure the limit on your home or building is sufficient to cleanup debris, re-permit and re-build after a loss. Most everyone underestimates the cost to re-build. Our best advice is to speak to your professional insurance agent at Ten Eyck Group and make sure you have the proper coverage and limits to protect you well in the case of a bad loss.
Also Read: How Business Interruption Insurance Helps After a Loss