4 ADJUSTINGTODAY.COM property limit to reflect changes in insured values. Unless effort has been made to keep a building property limit up to date with current appraisals, an ACV insured could get less than the current value of their property. Also, when it comes to insuring personal property (“contents”), commercial insureds must decide whether to value stock for its cost of production or selling price, and pay the corresponding premium. Relying on balance sheet entries could lead to underreporting of values and a net loss even after an insurance payout. Replacement Cost At the core of the current concern over underinsurance is the fact that property owners aren’t always aware that having “replacement cost” insurance does not necessarily mean they are covered for the entire cost of replacing a damaged structure. After a deductible is satisfied, basic replacement cost loss settlement pays for the actual cash value of damaged property plus additional costs to repair or replace it with property of like kind and quality. (Note: Under replacement cost coverage, the ACV amount is paid immediately, but the depreciation that is deducted is not paid to the policyholder until the repair or replacement is completed.) Functional replacement cost coverage is a less costly variant that pays to repair or replace damaged property with property that serves the same function, but is not necessarily of the same kind or quality. In personal lines insurance, replacement cost settlement is built into most homeowners policies; however, it must be selected on commercial property policies. Many insureds are surprised to learn that replacement cost settlement is still subject to a building property limit that may not be enough to cover the actual cost to replace damaged property, especially in demand surge conditions following a catastrophe. To minimize or avoid that shortcoming, two other forms of replacement cost settlement are provided by some insurers: • Extended replacement cost coverage, which pays an amount beyond the building property limit, usually expressed as a percentage of that limit. In some cases, agents are suspected of “low-balling” the building property limit on an Before repairing or replacing damaged property one must remove the debris and perhaps demolish undamaged portions of a structure (and remove that debris as well). WHAT TO WATCH FOR Does the building property limit truly allow for full coverage of the potential replacement cost?
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