Insurance-to-Value Appraisals: Keeping It Real

Insurance protects property against the unknown.  But what if the unknown includes the real value of the property?

To be insured correctly, an accurate valuation is important.  Under-insurance will result in insufficient coverage and, potentially, exposure to liability. Equally, over-insurance means the policyholder is paying too high a premium.

Properly and professionally valuing property does not just rely on some quick formula.  It is dependent upon the training, experience, and expertise of the person(s) undertaking the job, as well as the resources available to them. An experienced appraiser should consider many factors when conducting a valuation.   This includes taking into account inflation—especially when insurance coverage is not re-evaluated periodically.  Both material and labour costs can go up rapidly and significantly over time. Another often overlooked matter is putting a value on things like architect and engineer fees, administrative costs, and expenses related to building codes that could come into play in the event of reconstruction.

In addition, certain types of property require specific knowledge.  For example, a strata or condominium property necessitates that the appraiser understands the scope and complexity of common properties, including bylaws and owner agreements respecting these bylaws. Or, in the case of a property that is leased, the tenant may just fulfill the most basic of insurance requirements, whereas if the building needed to be replaced in event of a fire or other catastrophe, the insured amount may not cover full replacement value.

Even geography has an impact on valuation. Product and labour costs can vary from region to region, and climate can affect how buildings and components age, so having access to local pricing information is important when determining rebuild costs.

Of course, part and parcel to a good valuation is ensuring that the client fully comprehends exactly what is included.  Terminology must be clearly conveyed, as there have been cases where home and business policy owners have contested the definition of Actual Cash Value (ACV) in court.  At SPECS, we use the terminology Depreciated Cost Value (DCV) in all our documentation to clearly refer to the depreciated value of property reflective of condition and lifespan.  We do this so as not to leave wording open to interpretation, resulting in associated issues with the valuation.

Accurately valuing property can benefit different parties in different ways:

  •  Insurance-to-Value Appraisals protect the owner's financial position in case of loss.
  •  Brokers are protected against under or overvaluing the property.
  •  Underwriters receive the correct values to properly assess risk and limit exposure to liability.

People refer to an insurance policy as some peace of mind. That may be true, but real peace of mind can be better served if that insurance policy is backed by a comprehensive and proper valuation.

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