Broker Check

Insurance Values for Real Property

October 22, 2021

Most Property insurance policies cover real and personal property for replacement cost, which is the cost to repair or rebuild with property of like kind and quality. The usual alternative, actual cash value, is not defined but commonly it is replacement cost less depreciation. (Warning: unlike accounting where an asset can be depreciated to zero, insurable property always has a residual value.)

However, insurance consultant Richard Faber suggests in his Underwriter's Resource blog there is another option for valuing commercial real property. In his post ( Faber suggests functional replacement cost as a third option. This is not so much "build back better" as build back differently It can mean smaller size or different materials (although not mentioned by Faber, this could include more energy efficiency). It may also mean rebuilding at a different location.

As businesses rethink their operations in a post-COVID world, functional replacement cost may be the appropriate valuation.