We are considering a commercial policy for our properties (only 10 SFHs). New to this process and need help understanding the valuation amounts. Agent says I don't have to insure for replacement cost if I don't wish to. Is this wise? If this is an established practice, then how do I derive a valuation figure? How much invested or mortgaged? Any clarity on subject would be greatly appreciated.
Thanks in advance,
It primarily depends on your risk tolerance.
Replacement cost is safest and most expensive - the insurer calculates the price to rebuild new to current condition in the event of a loss.
ACV you can pick a lower value and insure less, paying less. Kicker is that everything major is on a depreciating basis. For example if your 30-yr roof has 10 years left on it and costs 10k to replace, in a loss you would only get 3.33k in insurance money.
If you can afford a little more risk, go ACV with an umbrella liability on the group. It will save you quite a bit.
If you want to play it safe and are tight, go replacement with low deductibles.
Hope that helps
@David Walkotten , thank you for your reply. I'm up for more risk, but unsure how to calculate the insured amount (less than replacement). Do I apply some % to the replacement value, based on my comfort level?
Regarding depreciation, this would apply to the structure itself? In the event of total loss, insured amount would be adjusted for the depreciable base?
Generally, Replacement Cost (RC) Coverage is the proper way to insure buildings. As David mentioned, if you insure on an Actual Cash Value (ACV) basis, partial losses are paid based on Replacement Cost minus Depreciation.
Because ACV for a building is usually a lower limit, the resulting cost of the policy is normally lower. Since you are dealing with SFH's you have the option of insuring them individually under a Dwelling Fire policy. Some Insurance carriers do not offer the ACV on the Dwelling Fire policies or do not give that the best rates. Even if you decide to go ACV, I would ask for quotes on RC basis to see if the savings is worth it.
One scenario where I see ACV used a lot is in older structures in towns with depressed pricing. I've seen the RC for those houses be 2 to 4 times the purchase price.
@John Mocker , thanks for your reply. All properties are currently insured individually at RC. I like your suggestion to receive quotes on both ACV and RC for the one commercial policy.
In my case, I insured 90k properties for just above our cost basis, around 50k. Replacement would probably be ~140k.
To be worth the higher risk and ins premium savings , you will probably want a decent spread between replacement cost and how much you choose for ACV. Maybe 50%?
@David Walkotten , that's what I was looking for. A % rate to apply.
Thanks so much!