As the U.S. has experienced inflation rates as high as 9% this year, insureds are finding their commercial property policies extremely devalued. In addition, labor shortages and a supply chain crisis have made repair and replacement costs inflated. Along with getting an updated valuation of your commercial property, now might be the time to review your commercial property insurance coverage to obtain a policy that provides protection for your financial needs.
Commercial property insurance coverage is not one size fits all. As policy options can vary in price and options, it’s important to choose a policy that fits your business’ unique needs. While policies can provide enormous financial coverage, always consider your property type as it may be more financially stable to secure a policy that offers adequate coverage with lower premiums.
Your broker can offer numerous commercial property insurance options as multiple factors can influence your property’s value. Common commercial policies and valuations include:
What Is Market Value?
Market value is the projected amount that a property would sell for on the date of valuation. A market value includes the physical structure and any land associated with the commercial property. Experts also interchange market value with open market value, fair market value or fair value.
Appraisers utilize several factors to evaluate a property’s market value. The buyer, seller or appraiser cannot influence considerations such as:
Market value is mostly utilized for the purchase or sale of a property. However, insureds should evaluate their property’s market value before renewing or applying for a commercial property insurance policy.
What Is Replacement Cost?
Replacement or reconstruction cost is an insurance coverage for building a replacement structure or repair expenses with similar or identical materials. Comparable to market value, replacement cost policies exclude land value. The considered amount is based on the cost to hire a contractor and purchase materials for a building’s repair or replacement.
As replacement cost only factors in building materials and labor, commercial property replacement cost should be lower than its market value. However, as the past year has taught us, materials and labor expenses can fluctuate. Along with other factors that influence market value, replacement property cost can be higher than its market value.
A replacement cost policy provides significant financial protection in the case of a loss as it doesn’t account for depreciation. Unfortunately, replacement cost isn’t feasible for every property as it’s typically a more expensive coverage option. Policyholders should remember that a continuous maintenance strategy and property renovations can lessen a building’s depreciation.
What Is Actual Cash Value?
Actual cash value coverage functions similarly to replacement cost as it covers the property’s cost to replace or repair. Differently, an actual cash value policy incorporates a compensation deduction to account for the original property’s depreciated value.
Repairs and rebuilds under an actual cash value policy utilize current construction techniques and materials. The contrast between the current cost and the original property’s depreciated value is covered only under a replacement cost policy.
Premiums for actual cash value coverages are lower than replacement cost plans and may be more appropriate for certain property types. For instance, an aged retail establishment located in a popular urban environment will depreciate slower in comparison to a business park’s new office building. The location-sensitivity of the store doesn’t necessitate any specific building type for operations, and an actual cash value policy with lower premiums would make more financial sense.
What Is Functional Replacement Cost?
Functional replacement cost is a less expensive option for property coverage. This policy is utilized when a functionally equivalent building could substitute the original property at a lower cost compared to construction. A property’s functional replacement cost is lower than the replacement cost and results in a reduction in the amount of coverage and smaller premiums.
Functional replacement cost coverage can also be used to repair a partially damaged property with less expensive materials, such as a wall restoration with drywall instead of plaster.
The main reason for using functional replacement cost coverage would be to save money with lower premiums. This is a favorable option for properties with expensive materials that aren’t relevant to the property’s function or buildings with intangible value that is irrelevant to their commercial function.
We’re Here to Help with Your Commercial Property Policy
The value of any piece of commercial property changes constantly. Safeguard your current and future assets by awareness of your property’s value and obtaining the policy that best suits your needs. Connect with a member of our team to appraise your property’s value and learn more about which type of commercial property policy is best for your business.