Insurance in its simplest form provides protection to you or your business in the event you experience a covered loss to help make you whole again. Your independent agent can offer real value through coverage counseling to ensure you have adequate and appropriate coverages. Whether you are looking to cover your home, a commercial building, or another insurance rider, it is important that your property is insured with an adequate limit and for the appropriate value. Without adequate coverage, you could be left paying for your loss out of your own pocket.
There are two options to determine the appropriate coverage amount for your property:
Replacement Cost valuation provides coverage for the amount it would take to rebuild your property at the same location using the same types of materials. There is no deduction made for loss of value because of physical depreciation.
Actual Cash Value (ACV) takes depreciation into account and deducts that amount from the cost to replace your property. Depreciation is the loss in value of the property due to obsolescence, time, and wear and tear and is subtracted from current replacement cost, not the original cost. This option is typically defined as “replacement cost minus depreciation.”
Another option, Functional Replacement Cost (FRC), is not as commonly used and allows you to replace the dwelling or building with a less costly material that is “functionally equivalent” to the existing structure. FRC provides a lower valuation than replacement cost, resulting in a reduction of the amount of insurance coverage required and, typically, a lower premium. FRC should not be used if there are no less costly materials available or the sole purpose is using a lower limit rather than Replacement Cost because the market value is lower than Replacement Cost.
Determining an adequate limit and an appropriate valuation is not an easy task and requires assistance from an insurance professional and in many instances your insurance company. The end goal is to craft a policy that protects your financial assets. Take the time to review your policies with your independent agent each year to ensure you are appropriately covered.
The coverages described above are in the most general terms and are subject to the actual policy conditions and exclusions. For actual coverage wording, conditions, and exclusions, refer to the policy or contact your insurance agent.
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