All small and medium size businesses undergo some changes since the first business property insurance policy is bought. Maybe it extends or changes locations. Even a maintained the same space for a number of years, a property review can be very useful to know your insurance is based on an accurate valuation.
What is property?
Property is considered to be anything that has value, which divides into two groups:
- Real property: Land and the permanent things on it, such as buildings, outdoor fixtures, permanent machinery and equipment.
- Business personal property: Includes all other property that cannot be classified as real property and can be easily moved, such as computers, telephones and office furniture.
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How is property valuation is done?
Doing property valuation is not so difficult, and your business owners’ policy depends on it. Commonly, businesses use two different methods in order to determine the value of their property:
- By calculating Replacement Cost (RC), which is the amount it takes to replace damaged or destroyed property with new buildings, equipment and furnishings.
- By calculating Actual Cash Value (ACV), which is the cost of the replacement of the property. This cost is minus the accumulated depreciation for age and wear. If you have still kept the records, such as receipts and expenses, you can easily estimate the replacement value of your office furniture, equipment, computers and other technological devices.
What next?
When you are establishing the value of your company’s real property, you will be inclined to insure it for the tax or market value.
We recommend you to purchase your insurance policy for the replacement value, because the RC have risen across most of the country and on the other hand market values have dropped. You can ask any other business experts and see that they agree with us, that it is better to buy insurance policy for replacement cost rather than insuring for actual cash value, although we must note that it could be a bit more expensive.
What factors can impact property value?
The following factors are taken into consideration as can be used to determine your business’ correct property valuations, so it’s best you know about them. These factors include:
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Direct and indirect expenses
Direct costs include the material and labor expenses, and in addition to those the property valuations should incorporate indirect costs, which basically include consulting fees, engineering services and other expenses that are not directly associated with rebuilding.
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Property age
Your property’s age can impact your valuation greatly because in the case of older structures, property valuations include additional construction costs that may arise from upgrading the outdated building materials and equipment.
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Building codes
Modern building follow certain codes and sometimes some older properties may also require doing certain modifications according to these modern building codes. Such as:
- Safety enhancements
- Plumbing improvements
- Sprinkler system changes
- Energy efficiency upgrades
Naturally, such adjustments will impact further compound construction costs, which ultimately will drive up property valuations.
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Property accessibility
In properties situated at steep locations or if the location of the property is adjacent to neighboring structures, the owner may need to have bracing or other safety measures during demolition and rebuilding operations in order to ensure the property accessibility.
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Unique features
Some properties have some unique features, and such custom property elements could possibly necessitate specialized construction work, which elevate the rebuilding costs. Therefore, these unique features can play a great role in property valuations.
Consequences of property undervaluation
Take property valuation very seriously because inaccurate ITV calculations and undervaluing properties will only result in facing a number of ramifications. That will lead to bad decisions when taking out a policy and in the time of need, businesses may lack sufficient coverage following property losses, forcing them to pay out-of-pocket expenses in order to fully rebuild. If the damages are severe the property losses and associated rebuilding operations could cost you so much, and since your insurance company is not liable for paying these costs, you are forced to pay for it out of pocket, which could lead to major financial setbacks and even in bankruptcy (worst case scenario).
In addition to what we just mentioned, property undervaluation can result in coinsurance penalties because, usually, commercial property insurance policies include coinsurance clauses. These clauses encourage policyholders to carry reasonable and accurate amounts of coverage and under a coinsurance clause, a policyholder is subject to a penalty if their coverage limit is not at least equal to a predetermined percentage of the value of their property. This penalty is, generally, a reduced payout.
How to improve a property valuation?
There are some additional practices with which businesses can review to ensure that their ITV calculations is accurate and even improve their property valuation measures:
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Find a reputable appraiser
In the insurance industry, third-party appraisals are actually considered as the gold standard in property valuations by commercial insurance providers. Appraiser offer reassurance that the calculations done were conducted by experienced and objective professionals. Since this job is very important, thus, we can say it is vital to look for a reputable appraiser who follows the Uniform Standards of Professional Appraisal Practice and the Code of Professional Ethics and Standards of Professional Practice from the Appraisal Institute.
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Seek additional resources
All business owners have access to additional industry resources, reference guides and validated tools in order to help ensure accurate property valuations. For example, the Marshall & Swift Valuation Service Cost Manual is a great tool that has been widely used by insurance companies
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Consult other parties
Of course, you can’t possibly do all the heavy work, it must be a team effort. Therefore, it can be very helpful to compile a variety of property data from multiple qualified parties during the valuation process.
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Make updates as needed
As you know, and if we pay attention to the market, we come to the conclusion that the value of a property is always changing, which means it’s imperative to update property valuations on a regular basis. Therefore, property valuations need to occur often. The frequency will depend on factors such as:
- Altered operations
- Shifting market conditions
- Property construction trends
- Changing property exposures
- Building upgrades or modifications
- The implementation of new technology or equipment on-site
