Avoid Overpaying for Property Insurance With Accurate Valuations

DECEMBER 3, 2024

Natural disasters such as floods, wildfires and hurricanes are increasing property risk. When your property is damaged, you expect all repair and replacement costs to be covered beyond your deductible. With today’s economic conditions inflating the costs of construction materials and tangible business assets, accurate property valuations and claims recovery need to be top priorities.

Insurance underwriters will frequently question the validity of values assigned to buildings and impose coverage restrictions when they think they’re inaccurate. Some may even refuse to offer any coverage if they are not comfortable with the valuations reported by the insured.

How to Achieve Appropriate Valuations on Your Property

Consider the following when setting appropriate valuations on your property and selecting adequate policy limits:

Have regular and complete property valuations conducted that reflect the true replacement cost values. Getting appraisals done at regular intervals ensures the property’s replacement cost keeps up with current market conditions. Be sure to keep an accurate inventory of stock and equipment values.

Relying solely on insurance companies to determine property values without vetting the results can lead to overinsured values and inflated premiums. USI Insurance Services uses the same tools as insurance companies, but also conducts a thorough review based on the actual circumstances of a client’s unique property risks. This helps secure maximum coverage while minimizing premiums.

Maintain accurate and detailed records when filing a claim. Document the purchase date and price — including serial numbers and model numbers for key pieces of equipment — and maintain records of any capital improvements made to the property. These include costs and dates of completion, as well as photographs and videos of the property and its condition.

Leverage the expertise of experienced professionals. Local contractors can help determine if valuations are accurate. Additionally, USI’s experienced insurance professionals can offer expert advice on maximizing claim recovery.

Don’t Overpay for Your Property Insurance

If the property is not valued correctly, you could be overpaying for your insurance. For example:

• Inflation Guard — is an additional insurance feature designed to protect policyholders by automatically increasing the insured value each year. While it is framed as a benefit, it can also lead to higher premiums. If the inflation guard percentage exceeds the actual rate of inflation, you may end up overinsured and overpaying.

For example, your $5 million building has a 6% inflation guard added to the policy. When the policy renews, you are going to pay a premium on a building value of $5.3 million ($5 million x 1.06); the following year, you will pay a premium on a building value of $5.62 million ($5.3 million x 1.06), and so on, as the original $5 million replacement value continues to compound 6% each year. Assuming an average inflation rate of 2.5% over a five-year period, you would be over-insuring your building by $1,034,086; in this case, that would equate to paying 18.2% more in premium.

• Coinsurance — requires policyholders to insure their property to at least the percentage specified in the coinsurance clause. If this requirement isn't met, the claim payment will be reduced.

For example, a building that’s been insured for $5 million with a 90% coinsurance clause suffers $1 million worth of damage. The insurance company has valued the building at $6 million, which means they have been insuring the building at 83.3% of the true replacement cost value. The 90% coinsurance clause required them to insure the building at a minimum of $5.4 million. Because the insured did not meet the coinsurance requirement, they will be penalized on the recovery amount. They would only receive $925,926, and the difference of $74,074 would be the insured’s responsibility.