Insurance To Value: What is it, and Why is it Important – by Peter Crowe

Posted March 29, 2024

Author – Peter Crowe, Account Executive – Horst Insurance

If you or your business owns any property, you may have heard the term Insurance To Value (ITV). But what is it? Especially considering the current Property Insurance market, it has become more important than ever to understand its meaning, its implications, and what to do about it in order to most effectively protect yourself and your business should a catastrophe arise.

So, what is it? Generally speaking, ITV refers to the full cost to rebuild your property vs. the amount that property is insured for on your policy. Both you AND the insurance company have a vested interest in making sure that ITV calculation is 100%, meaning your property is adequately insured. However, recent industry data suggests that an estimated 75% of commercial properties are underinsured by 40% or more. That could be devastating to you or your business in several ways: 1) having insufficient funds to rebuild, 2) having coinsurance penalties assessed by the insurance carrier – providing less coverage than you thought would be there in the event of a claim, 3) adding time to when your business could be up and running again, and more. These could lead to major financial setbacks…even bankruptcy.

Let’s look at why you might be underinsured:

Cost to rebuild. Due to supply chain issues resulting from the pandemic, material costs skyrocketed. Even with some moderation in recent months, approximately 83% of construction material costs have jumped an average of 19% since 2020. Couple that with labor costs that have seen dramatic increases post-2020, every construction project costs more. A LOT more.
Relying on your insurance carrier to determine proper reconstruction costs. While carriers can utilize certain benchmarking tools and software to determine approximate values, that’s not the design of their business. It’s not what they do.
Using real estate market knowledge and comps to determine values. That’s not accurate construction information.

How can you protect yourself? Let’s touch on some ways to address the insurance-to-value calculation, and help mitigate the risk of being underinsured:

Get an appraisal. We’re not talking about the one the bank does. You need a Replacement Cost appraisal from a reputable third-party who will take all factors into account (square footage, construction type, age, unique features) to properly ascertain what it would cost to rebuild. It may cost you a few thousand bucks to get it done, but will be worth its weight in gold (or concrete and timber) if and when you have a loss.
Consider inflation. While many property insurance policies may contain a provision for inflation (Inflation Guard), it’s not enough to keep up with what’s been happening the last 4 years. Typically, an inflation provision can automatically increase your limit 4% annually. That may have been acceptable through 2019. But in the years since, construction inflation has been at an 8-12% clip annually. In just a few short years, you could be significantly under-insured if you haven’t adjusted your insured building limits appropriately.
Even if you do get a proper appraisal done, be sure you’re updating those numbers annually. Also make note of any improvements/changes to the building(s). Those items need to be accurately accounted for.

There is a seemingly endless list of threats to your business. Don’t let improper Insurance To Value be one of them. Having the right insurance coverage can mean the difference between survival and financial ruin. Contact our office today and see how we can help put your mind at ease. It’s who we are. It’s what we do.