Coming up with ways to arrive at property insurance limits

One of the more difficult areas for the small business owner to address when setting up their business insurance policy is setting up the property damage limits. There are 2 standard approaches, either using replacement cost, (RC), or actual cash value, (ACV). Replacement cost is defined as the cost to replace the property new today with material of like kind or quality. ACV is replacement cost less physical depreciation. Remember that when insuring real property, either through the RC or ACV options, to exclude land value value since nearly all policies exclude coverage for any damage to land, landscaping or pavements. Usually the best place to start is with a professional appraisal when arriving at insurable values. The best place to start is in your local directory or by searching locally on the internet for appraisal firms. Typically, appraisals are prepared for the market value of the property, using either a cost approach, an income approach or a market approach. The income approach analyzes value based on future income stream and market approach determines what price the property will sell for. The figures used in the cost approach section are the ones that should be used in determining insurable value. The cost approach comes up with the cost to rebuild, along with other improvements, and identifies the amount of physical depreciation and economic obsolescence. There are further steps after this point I will discuss in my next post.

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