Property Valuation - Insurance Valuation

I was cleaning out some file drawers last week and found a document that I must have placed in the file when I first started in the insurance business, 30 years ago.

It's from Millers Mutual Insurance Company. The paper describes the different ways that property can be valued. No author is listed, so I cannot give proper attribution. I am borrowing (and updating) the ideas here.

The paper describes a commercial property.

Original Cost: $1,500,000
Fair Market Value: $2,500,000
Orderly Liquidation Value: $1,500,000
Forced Liquidation Value: $750,000
Replacement Cost: $4,000,000
Net Book Value: $500,000
Actual Cash Value: $3,000,000 (The article is so old it calls this "insurable value.")

To the above we could add "Functional Replacement Cost," the cost to replace the structure to its function.

Let's say that is $3,500,000.

Insurance is concerned with Replacement Cost (the cost to replace using current cost of materials and labor), Actual Cash Value (the replacement cost minus depreciation), and functional replacement cost.

Original Cost, Market Value, Liquidation Value, and Book Value are of no importance in 99.9% of property insurance policies.

Most property insurance policies are written to Replacement Cost.

When I started in the insurance business, I recall arguing with an underwriter who would not write replacement cost insurance. He said it was against the principles of insurance, as it put an insured at a place better off from where he was the day before the fire.

I recall hearing that some Western state banned replacement cost coverage.

Talk with your insurance advisor about how the property on your insurance is valued. Consider what you would do if your building was destroyed. Share your plans with your advisor so she can structure your policy correctly.

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Dog Bite Claims Top $400M in 2009; Rise 30% in Last 6 Years

Dog bite claims cost the insurance industry $412 million in 2009, an increase of 6.4 percent from 2008.

Dog bites account for more than one-third of all homeowners insurance liability claims paid out in 2009, says the Insurance Information Institute (I.I.I.).

An analysis of homeowners insurance data by the I.I.I. found that the average cost of dog bite claims was $24,840 in 2009, up slightly from $24,461 in 2008.

Full Article Here From Insurance Journal

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Scott's Rules of Insurance - Rule 4 - Insurance Is A Process, Not An Event

Rule 4 -  Insurance is a process, not an event.

Managing your insurance is not just about your policy renewals.  As your business changes, your insurance must change.

Your insurance is determined by your exposures.

Certainly the renewal process is important.  However, there needs to be a regular chance to review and update coverage during the policy year.

You buy insurance as a part of a plan to manage risks - insurance does not create risk - insurance is a tool to mitigate the impact of risk.  For example, you have the exposure of employees causing an accident while driving their personal car on company business.  You transfer that risk to your insurer when you buy non-owned auto insurance.

As your exposures evolve, your insurance should evolve.

Open claims should be reviewed at least quarterly.  Halfway through your workers' comp year, you need to push adjusters to reduce open claim reserves.  

Monthly walk-throughs help to identify hazards that have developed.  

If nothing else, talk with your insurance advisor a few times a year to update him on changes you have made to your operation.  You'll also hear of emerging insurance issues - if your advisor is any good.  You can get help with budgeting for the future.

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Scott's Rules of Insurance - Rule 3 - Preventing A Loss Is Better Than Being Insured

Rule 3 - Preventing a loss is better than being insured. Limiting a loss is the next best thing to preventing it.

I consider any loss as a failure in some system. Build operations and procedures to prevent and limit loss. Place backups. Create stop-gaps and fail-safes.

Inspect your electrical systems annually. Install water-usage alarms to notify you of a burst pipe. Test your evacuation plan. Install a security system. Build a video surveillance system. Perform regular inspections of your facilities. Look for unsafe conditions, hazards, maintenance issues.

In a heavy rain, inspect for water flow around your property. Where is water collecting? What could prevent water from draining away from your buildings?

Consider "what if" scenarios. What if our computer crashed? What if our main supplier shut down? What if we lost power for 5 days? What if our best customer cancelled?

Redundancy is an often overlooked tool. I have a home phone, cell phone, and Skype subscription so I am sure to be able to get and make calls. I backup my computers on-line to a server in the mid-west. I also backup my computers on a separate harddrive. I have a generator at my office in case the power goes out. Much of my work is online so I can work from almost anywhere.

Build a communications plan. Have an accessible, updated list of customers, employees, suppliers, and service providers.

Any disruption is expensive. Plan to prevent disruptions and to limit them.

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Scott's Rules of Insurance - Rule 2 - Insurance Is For The Big Stuff

Rule 2 - Insurance is for the big stuff - you take care of small stuff.

Stuff happens. Life and commerce include ups and downs. Bumps in the road should be paid for out of your own pocket. Catastrophes is where insurance comes in.

Use deductibles to limit the involvement of the insurance company in minor losses.

Look to the other side of a loss - the total amount. Use deductibles to decrease premium and put that premium towards higher limits of coverage and broader perils. Consider adding coverage for events that are normally excluded, like flood and earthquake, that could be catastrophic.

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Scott's Rules of Insurance - Rule 1 - Insurance Is All Fine Print

Rule 1 - Insurance is all fine print - work to understand it.

Insurance policies are written by insurance companies to cover specific risks and exposures.  Every word is carefully placed to clarify, expand, and restrict coverage.  There are no hidden meanings.  There is no subterfuge.  Ambiguity in insurance contracts can be disastrous for the insurance company as courts always read confusing language in favor of the insured.

Courts, too, help define insurance contract language.  Precedent moves insurers to further clarify language.

A basic understanding of insurance is not a Herculean task.  For almost 5 years, I have made 480 posts trying to explain insurance concepts and issues to insurance buyers.  Your insurance agent is available to help too.  Heck, helping insurance buyers is why I'm in business.  All you have to do is call.

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The Simmonds Business Insurance Index™ - August

The Simmonds Business Insurance Index™ August, 2010

Renewal Premiums -5% to Flat

Renewal Coverages Liberal Terms

Buyer's Outlook Long-Term: Prices Flat

Notes for August, 2010

The best way to describe the current insurance marketplace is confused.

Underwriters want more premium. However, competition is preventing them from inching premiums up. At the same time, uninformed buyers are in a mode where they almost expect premiums to go up based on the overall sour economy.

That attitude allows insurers to bump premiums by 5% with very little push-back. However, if there was pressure on the underwriter, the premium increase would go away.

Uninformed buyers are allowing their premiums to increase.

I continue my advice from prior months: If you have not bid your insurance in a few years, get out there. You will pay too much for your insurance this renewal without some competition - even if it is just rattling your agent's cage a bit.

Start the renewal process early - 120 days minimum. If you are not bidding, tell your agent that you expect your renewal rates to drop by 5% and that you want confirmation of this by 90 days before renewal. Without that assurance, go to bid.

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