Commercial Property Insurance – ACV (Actual Cash Value) basis versus RC (Replacement cost) Valuation
By Brad Shrum
With soaring property pricing and values that are increasing as well, small business owners are also faced with a reoccurring dilemma:
How should my property be valued and what are the options, advantages to each? Which is right for me given my situation?
With these questions also comes at times a well-meaning contractor that will often make a comment such as “well I can build this for a stated amount”, always lower than an insured currently has the building valued. While this may or may not be true, it presents a challenge as commercial agents to help our clients understand in simplistic form, what they are getting for their premium dollars. Insurance companies use the term “cost to rebuild”, meaning replacing a building damaged with a same building likeness. This can also present confusion to a client. A common response, at least from churches is, “we don’t intend on building the building back that way”. To which we have to explain that what we are insuring is what the building is at the present time. This is where having a recent building evaluation is invaluable.
Our team at MAX Insurance Agency can help you complete a building evaluation.
First to understand each valuation basis –
ACV (Actual Cash Value) – building evaluation appraisal, usually from a Boeckh/Marshall Swift valuation, less the depreciation amount, less the coinsurance percentage chosen. ACV will almost always carry an 80% coinsurance factor. Depreciation can be a tricky and at times a judgement opinion. Our commercial carriers range from 25% only (GuideOne) to 35% (Travelers and Hartford) to 55% for Gateway and AmWins on the high end.
RC (Replacement Cost) – building evaluation appraisal, less the coinsurance percentage if desired. RC valuations can range between 80% and 100% coinsurance factors. Most are written at 90% but additional credit is given off the rate of 100% is that is desired.
Before going forward it’s important to know that few, if any, of our standard carriers will insure their Business Owners Policy - BOP’s (aka small commercial policy ) at ACV, but is mandatory for RC values being carried, and coinsurance is waived within the form. So the need to carry RC values.
Here are two examples to consider –
1. An auto repair shop – concrete block, built for this purpose in the 1950’s with 1,200 square feet. Constructed for this purpose and well maintained with current updates including a nice roof. This class is eligible for a BOP so we are looking at RC only. Here is the RC valuation:
Boeckh appraisal - $150,000 for RC cost. Coinsurance is waived so the amount carried will need to be $150,000.
2. On a non-BOP, the insured may want to look at this $150,000 appraised value, and due to the age take 35% depreciation, making the insurable value $97,500. With that they could add the coinsurance at 80% and actually carry $78,000. So you can see the disparity in values and ultimately in the total insurance cost for the building.
A lot of clients will jump at this lessor amount, but the claims payouts are also vastly contrasting between ACV and RC.
Most clients may understand a total loss scenario, but will be surprised unfortunately at a partial loss payment, and even more so if coinsurance values are not carried. Most telling is a total loss on a roof that is insured ACV and can be disastrous for an insured having to replace a new roof with ACV dollars.
There are instances though, with older buildings, that ACV should be the only option considered. And with newer buildings it wouldn’t make sense for any valuation other than RC.
At MAX Insurance Agency, Inc., we can help with valuations and insurance products that help meet our clients’ expectations on coverage, limits, and premiums.
We would love to help you with your commercial insurance needs. Contact us at 800-832-4689 or complete our Check Coverage Form here.
Brad Shrum, CPCU
Brad has worked at MAX for the past 18 years and has over 30 years of experience in the insurance industry doing underwriting, field management work, and sales. Outside of the office, Brad is an ordained Southern Baptist Deacon and a Sunday School teacher of 30 years. In addition, Brad is a long-time Vacation Bible School teacher and has an ongoing 20+ year Nursing Home Ministry. Since he was a young teenager, Brad has been an avid goose hunter, traveling across North America while pursuing this noble bird and enjoying the outdoor world.