Insurable Value

Insurance Replacement Valuations

Is your home properly insured? You need to know the answer now, not after a catastrophe.

For many people, their net worth is made up largely of a home. It’s common for many homes to be under-insured and in some cases over-insured. When you’re under-insured, it means something as common as an electrical fire could wipe out nearly all of your net worth. And if you’re over-insured, you’re wasting hundreds or thousands of dollars that could be put to better use.

A key component in your home insurance is the Insurance Replacement Valuations. This is defined as “the cost of replacement of all improvements to a property which could conceivably be destroyed.”

The insurable value is less than the property’s appraised market value, because it excludes the value of land on which the building stands. The formula for computing the insurable value is usually stated in the valuation clause of the insurance policy document. Some clauses can either include or exclude the foundation and certain portions of the plumbing and electrical systems.

Insurable value appraisals and services are generally used for the following purposes:

• Proper Placement – Determine the proper amount of insurance to be carried to assist in recovery in the event of loss, without paying premiums for excessive coverage that can never be collected.
• Proof of Loss – Establish a reasonable basis for preparing the required proof of loss in the event of a catastrophe.
• Updating – To provide the client with a report which facilitates its revision on an annual basis in order that the property record and insurable values may be kept current.
• Damage Verification – In the event of a catastrophe within the county, we provide verification inspections to determine if properties were damaged.

Replacement Cost New (RCN)

For insurance purposes, it is necessary to establish the “replacement cost new” for the existing property assets that are the subject of the valuation. In determining this value, an estimate of the replacement cost of the assets is determined by utilizing an appraisal technique referred to as the cost approach. In using the cost approach, the value of a residence is determined by the current expense of constructing a similar structure of like utility.

In the case of real property valuations (buildings), once the overall replacement cost for the asset is established, a reduction should generally be made to account for items that are excluded from coverage under the insurance policy. Examples of items typically excluded include the building foundation, underground piping and wiring.

The final value is then reported to the client and/or their insurance carrier for establishing the appropriate amount of coverage for the real property.

At Valuation Technology, our professional Insurance Replacement Valuations establish an independent, insurable replacement value of residential real estate. The results of our valuations are generally used by lenders, homeowners and insurance carriers to determine the proper amount of insurance to be carried on a residence.