Property & Casualty Insurance Procurement & Litigation (8 of 10 Reoccurring Themes Every Lawyer Should Know)
Property values matter and vary based on the purpose of the valuation. Although this issue seems easy, there is more contention at the time of a property claim on this issue than practically any other issue.
The problem is usually the misunderstanding on the part of property insurance buyers as to the relationship between “Market Values,” which is usually how much they paid for the property, versus an insurance contract’s definition of property value. In a property insurance policy, usually there are two ways and sometimes three ways of purchasing the correct value. The first is “Replacement Cost,” which is the cost of repairing or replacing the property with like or similar materials or paying cash for up to the replacement cost designated on the policy. The second is “Actual Cash Value” meaning replacement cost minus depreciation and the third is “Stated Amount Value” meaning an agreement is made up-front with the insurance buyer and the insurance company as to how much the property is worth and the valuation basis at the time of a claim.
Confusion often arises for two reasons: First, over the difference between the Replacement Cost Value (what it would cost to repair or replace with like materials) or Actual Cash Value (replacement cost minus depreciation) of a structure and its market price. Market price has nothing to do with the insurable value and is based on a completely separate set of criteria. Primarily, it is based on location and real estate market forces; secondly, the amount borrowed from a lender to purchase the structure and the lenders’ contractual requirements for purchasing coverage to protect their interest.
It is also important to note the operative words: "their interest" and what the policy says. “Their” interest and the owner’s interest are often confused and the property owner sometimes gets the impression that the amount of insurance they should buy on a purchased building is whatever the lender requires of them. This is incorrect. It is a difficult lesson to learn after a claim occurs and there is a misunderstanding how the claims adjuster will value the property.
Lesson #8: Have your client (the insurance buyer) request a “Stated Amount” endorsement to the policy, which is an agreement between the insurance buyer and the insurance company as to what the value is and how it will be adjusted, overriding any policy provisions to the contrary in the actual policy.
ABOUT THE AUTHOR: David L. Stegall, Principal Consultant, Risk Consulting & Expert Services
David Stegall is the Principal Consultant at Risk Consulting & Expert Services. Mr. Stegall holds a B.A. in Communication from Auburn University and is a Chartered Property and Casualty Underwriter, an Associate in Risk Management and an Associate in Reinsurance, all awarded by The Institutes in Malvern, PA. He is also a Director of the Society of Risk Management Consultants.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.
