Mind the Gap: What you need to know about Insurance to Value

2 minute read Published on Apr 18, 2024 by BrokerLink Communications

Large commercial property under sunny sky

If you’re a commercial building owner or planning to become one, learning about Insurance to Value and why it’s important can save you valuable time and money in the long run.

What does Insurance to Value mean?

Insurance to Value (ITV) ensures that your business’ insurance coverage accurately reflects the full value of your insured property.

Why is ITV important?

If your property isn’t insured for its full value, you will be responsible for paying a portion of the restoration costs in the event of a claim.

To obtain insurance, you must determine the value of the building based on its replacement cost value, which means the cost of replacing the building following a loss with like-kind, quality materials and craftsmanship. Not to be confused with market value which is the price you would get for your building on the real estate market, which includes land.

What if my property isn’t insured to value?

Your insurance premium is based on the property values provided to your insurance company and the amount of insurance purchased, or “limit of insurance” must equal the replacement value of the property insured in the event of a claim. If the limit of insurance is less than the actual value of the insured property at the time of a claim, you haven’t paid enough premium to cover the risk, which may trigger what’s known as a co-insurance clause.

A co-insurance clause is common in most commercial insurance policies. It applies when the limit of insurance is less than a certain specified percentage (for example, 80 or 90 per cent) of the actual correct replacement value of the property insured.

How does co-insurance work?

Two examples illustrating how co-insurance works are provided below:

Total loss example

A building insured for $2,000,000 is destroyed completely by a fire. An assessment determines that it will cost $2,250,000 to rebuild a similar building, however, the insurance policy only covered a $2,000,000 limit, therefore, the customer is responsible for the $250,000 shortfall.

Partial loss example

A building insured for $1,000,000 is damaged during a storm, which result in losses totalling $100,000. At the time of the loss, it is determined that the replacement cost for the building is $1,250,000. A 90% coinsurance clause is applicable to the policy. The payout for the loss would be calculated as follows:

  • Building limit $1,000,000
  • Value at time of loss $1,250,000
  • Co-insurance 90%
  • Limit of insurance $1,250,000 x 90% = $1,125,000
  • Insurance purchased (1,000,000/1,250,000) = 80%
  • Cost to repair $100,000 x 80% = 80,000

The insurance company will pay $80,000 (less the applicable deductible), the customer must pay $20,000 plus the deductible.

This highlights how if the co-insurance clause is applied, you may only collect on the portion of the loss equal to the amount of the limit of insurance applied to the actual value of the property.

How do I ensure my coverage reflects Insurance to Value?

It’s a customer’s duty to confirm the value is accurate, so hiring a professional building appraiser to complete a reconstruction assessment is the method recommended to help determine an adequate limit.

Industry standard tools may also be used, which require customers to provide full address, building type, occupancy, construction class, square footage, and number of stories. However, this alternative method does not replace a professional appraisal; it is to estimate a building’s reconstruction cost and its valuation should only be used as a guide to help determine an approximate value. The customer should review the findings with a reputable building professional to confirm accuracy.

To ensure adequate insurance to value, businesses should review insurance coverage annually, or when there are significant changes to their business and assets. This helps to maintain regular valuation of assets, including property, equipment, and inventory and ensures coverage is updated to mitigate risks. It’s also a good opportunity to consider additional coverage that’s not included in standard policies, such as equipment breakdown insurance and cyber insurance.

Contact BrokerLink

Speak to a BrokerLink advisor if you have questions about insurance to value or if you want to review your policy to ensure it’s updated with the coverage you need.