Today we are going to discuss property values for businesses and homeowners. I’m sure at some point in your life you’ve heard of this term, insured to value or proper valuation. I would like to break down this term so you can understand why it is so important.
Regardless if you are a business owner or personal home owner, property values affect you the same way. Some of you may be rolling your eyes and think this is just a fancy way for those nasty insurance agents and companies to make more money. I assure you this, it is not a tactic to squeeze every dime out of you. It really is about looking out for your best interests.
Be it business / commercial accounts or personal homeowners, it is very important to keep these values as close to the actual value of the building. The example I like to use is Hurricane Katrina. We all know about Katrina and its destructive aftermath. After Katrina, claims adjustors raced down from all over the United States hitting the streets to handle all of those claims. Stories surfaced about building owners being paid the full “policy” limit and not what it would take to replace the building. Why did this happen? The mindset of many building owners at that time happen to believe these areas have not had a strong Hurricane in 50 years. Besides, we can save money on our insurance costs if we lower the value of the building. Temporarily yes, you’ve succeeded in lowering your premiums but it comes at a price. Here is an example of what I mean. Let’s use a value of $250,000 for a building. Let’s say the replacement value of this building is $350,000 so you underinsured its value by $100,000. You might be thinking why not, you haven’t had a loss and you don’t foresee a loss so let’s save the money. The real cost of that $100,000 valuation difference equates to roughly $250 per year. So if you take the example above, 50 years will get you a total savings of $12,500. I think we can all agree on a couple of things. One, no one usually has their building or home that long and two the value of materials and labor will increase over time. So for argument sake, everything stays the same. You save $12,500 over 50 years and live with the building valuation short by $100,000. This means is you are now personally responsible or think of it like this, you became your own insurance company for the difference. In my Katrina example the insurance companies paid building owners the $250,000 and were happy to do so. I’m sure you know why, they saved $100,000 per building! This is real, even today some of those homeowners are still living in a government provided RV/Trailer with no home rebuilt because they cannot rebuild with the money they received. Someone lost, and someone won.
What should you do? Have your agent run what we call in the insurance business a Marshall & Swift/Boech report. This property valuation report takes into consideration your location, square footage and many other particulars of your building and comes up with a valuation. This process is not 100% accurate all of the time, but it is the only thing in the insurance world we have to value properties. So ask for it, look it over, make sure it takes into consideration everything your building has to offer.
Back to my Katrina example. In my example of using 50 years of ownership, most of us don’t own the building that long. Maybe 10 years making your total savings only $2,500 and gambling the other $97,500.
Thanks for reading, if you have any questions please drop me a note.