When it comes to purchasing or renewing commercial property insurance, ensuring correct property valuations is vital. It can make all the difference in providing sufficient protection and preventing coinsurance penalties amid covered property losses. Yet, inflation, escalating construction prices and supply chain challenges are creating a multitude of valuation headaches. Fortunately, there’s relief. By understanding essential factors that play a role in gauging property value, recognizing the risks tied to undervaluation and adopting strategies to enhance property valuation accuracy, you can navigate these stormy waters with a clear head.
FACTORS AFFECTING PROPERTY VALUATION
To establish accurate property valuations, businesses and organizations should consider critical factors that influence assessment, such as:
- Direct and indirect expenses: In addition to direct costs like materials and labor to repair or replace, property valuations should incorporate indirect expenses such as consulting fees and engineering services contributing to the replacement costs.
- Property age: older structures may require additional construction costs for upgrading outdated building materials and equipment.
- Building codes: aged properties might need modifications to adhere to modern building codes during rebuilding, potentially increasing construction costs and property valuations.
- Property accessibility: Properties in challenging environments may require safety measures during demolition and rebuilding, which should be factored into valuations.
- Unique features: Custom property elements could lead to specialized construction work, increasing rebuilding costs.1
CONSEQUENCES OF UNDERVALUATION
Underestimating property value during insurance calculations can have serious consequences. You may find yourself underinsured after property damage or a total loss. An inaccurate insurance amount my require out-of-pocket expenses for complete rebuilding.2 Depending on the scale of damage, this can lead to significant financial setbacks and even bankruptcy in some cases.
Undervaluation can also trigger penalties. Insurance companies often include coinsurance clauses in commercial property policies. These clauses encourage policyholders to maintain accurate property insurance valuations to avoid penalties. If coverage is below a specified percentage (e.g., 80%) of property value, a coinsurance penalty can result, limiting the recovery amount following a loss.
4 TIPS TO IMPROVE PROPERTY VALUATIONS
Improving property valuations is all about starting early and getting help. To enhance property valuation accuracy, consider implementing these tips:
- Engage a reputable appraiser: Third-party appraisals by experienced professionals are recommended for accurate valuations.
- Use additional resources: Industry tools like the Marshall & Swift Valuation Service Cost Manual offer validated data for valuations.
- Seek input from various parties: Gathering insights from accountants, contractors, commercial management companies, real estate experts, and others can contribute to better valuation decisions and help you benchmark based on similar properties.
- Keep valuations updated: Property values change with market conditions, so regular updates, at least every three to five years, are vital.
Navigating Valuation Challenges: Coverage and Resilience
As these challenges continue to impact the value of properties and their contents, organizations should assess the adequacy of their required insurance coverage on an ongoing basis and aim to make adjustments that will help them to ensure proper coverage and recovery following a catastrophic event.
As the landscape shifts and large property insurance procurement becomes more of a headache, we know you need more than a panacea for the pain – you need real risk management solutions. That’s why we pride ourselves on helping you stay ahead of the curve. Grounded by data, we synthesize vital insights to help you steer through uncertainties, achieve your business objectives, and thrive. We’re about more than just today’s solutions; we put processes in place to continuously identify new strategies that align with your unique organizational goals.
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- “The Importance of Insurance to Value for Commercial Property Coverage.” com. Retrieved Aug. 2023. https://cms.zywave.com/content/455052?referenceGuid=530c49c4-5aee-41a8-b36b-04108b00de5d&fromLabel=Search%20results&internalHref=%2Fsearchresults%3Fquery%3Dvaluation%26searchType%3Dcontent%26pageIndex%3D0%26sortType%3Dmatch&defaultLanguage=en-us
- Russ, Banham. “The Changing Value of Property Risk.” Risk Management Magazine.com 2022. Retrieved Aug 2023. https://www.rmmagazine.com/articles/article/2022/02/01/the-changing-value-of-property-risk