PAGE 4 PROTECTING YOUR PROPERTY ® 888.321.5200 | ai-mbc.com Sheila E. Salvatore, Editor | Editor@AdjustersInternational.com Copyright © 2020 Adjusters International, Ltd. All Rights Reserved. E13-1021 Insights for Your Industry® is published as a public service by Adjusters International, Ltd. It is provided for general information and is not intended to replace professional insurance, legal and/or financial advice for specific cases. Navigating a Hardening Property Market Continued to today’s functionality. Also, coverage forms could be considered to be changed to Actual Cash Value (ACV) or Agreed Value (AV), as buildings could still serve the same purpose but be replaced for less than they would cost to rebuild to the specs that applied when they were originally constructed. Without a very thorough analysis these decisions should not be made. Coverage Form While the limits as noted above can be changed to reduce premium, directly associated with these limits are the coverage forms. Most commonly used for property insurance are the RCV, ACV and AV forms. RCV guarantees to replace/rebuild the destroyed/ damaged property as it would have been when it was originally constructed. ACV, on the other hand, is RCV minus depreciation. AV is the agreed value between the insured and insurance carrier, at the requested value of the property. An AV form will waive the coinsurance requirement. Coinsurance requires that property be insured to the RCV by 80 percent to 90 percent, or whatever percentage the carrier requires. If the property is insured to less than the coinsurance requirement, then a penalty will be applied when recovery is sought following a loss. The following example will look at the impact of insuring to a value below the coinsurance requirement. Scenario: Property limit is insured to a value below the coinsurance requirement. The resulting impact: Coinsurance penalty and reduced recovery. Building limit: $50,000,000 Value of the building: $100,000,000 Coinsurance: 80% Limit of insurance should be: $100,000 x 80% = $80,000,000 The amount of insurance purchased is only 63% of the amount required ($50,000,000/$80,000,000). Coverage is afforded for only 63% of the repair cost. Cost to repair damage: $30,000,000 63% of the repair cost is 30,000,000 x .63 = $18,900,000 Deductible $1,000,000 The amount payable on RCV $17,900,000 In this scenario, if an organization believed they were willing to assume the risk and reduce limits to below the coinsurance requirement, they could see a cost savings upfront on a reduced premium — but ultimately reduce their amount to recover on should a loss occur. NOTE: Above example does not consider any depreciation being deducted from the cost of repairs.
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