Replacement Cost Versus Market Value

By: Advocate Brokerage

By Roz BindayImage The tragic before and after

Do you know what insurance to value means? As everyday consumers, we sometimes have the tendency to brush off and ignore such industry jargon, but the following situation shows just how important understanding them—and making sure your agency provides adequate coverage—can be.

On a cold March evening in South Dakota, one homeowner was smoking a cigar in the garage and dropped the ashes into the garbage can. After they went to bed, those same ashes smoldered all night, eventually igniting and engulfing the garage in flames. The fire quickly spread throughout the house, and though the fire department fought bravely in early hours of the morning, it was too late—the home was a total loss.

This tragedy is any homeowner’s worst nightmare—everything you hold dear, gone overnight. However, out of this nightmare there came one bright spot: the chance to rebuild.

Insurance to value (ITV) is a phrase which means that your insurance policy is written in an amount equal to the value of the property—basically, that your policy limits are sufficient to replace the covered property in the event of a total loss. Adequate ITV is not to be scoffed at—if insurers don’t have accurate value assessments for the assets they insure, they risk their (and their clients) long-term financial stability.

Luckily, the ITV on this home was 98% at the time of the fire thanks to coverage that was adjusted upwards to keep up with inflating construction costs.

Chubb, a very proactive carrier, appraised the home on Oct. 3, 2007, for $630,393, and assisted the homeowner with annual updates. Thus, the coverage at the time of loss was $697,000, and the final settlement was $709,684.

Because the client was able to maintain and update their coverage—even though real estate values were plummeting and the country was in a recession—they were able to rebuild what they lost with quality materials and workmanship.

At Advocate, while we hope that such misfortune never befalls one of our clients, we stay on top of our clients’ needs to make sure they’ll be covered if the unthinkable happens.

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