Property evaluators outside a building

Navigating the High Stakes of Property Valuations: Why Accuracy Can't Be Overlooked

To get the most accurate valuation, business owners must provide the most complete and in-depth information about their property as possible.
The number of risks facing business owners continues to increase. From a catastrophic natural disaster to a ransomware attack to an essential piece of equipment breaking down, business owners need to be sure they are purchasing adequate insurance to stay ahead of any risk exposures they might face.
Accurate property valuations are an essential component of any property insurance program. Yet, companies often unknowingly underreport the value of their property assets, potentially leaving them underinsured.
To support accurate valuation, it’s critical for a business owner to provide as complete and in-depth of information about their property as possible. This includes the size, age and use of the property, as well as any specific or unique construction details.

The Role of Property Valuations in Commercial Property Insurance Coverage

Savvy business owners understand the importance of regularly updating valuations to ensure they reflect market changes. Given that labor and material costs will fluctuate, it's a best practice for property valuations to be revisited minimally on an annual basis. In the past, annual valuations changed about 2%-3% each year, but recently those changes have been as high as 5%-8%.
For instance, companies often underestimate the actual replacement cost of equipment. This underestimation could lead to a business not being insured for the full price of replacing an essential piece of equipment, which would mean they have to pay the difference out of their own pocket.
Reconstruction costs have been impacted by recent inflationary pressures, which makes it even more critical for companies to provide their insurer with the actual cost to replace property or equipment, not the book value. There is a big discrepancy between book value, which is what the company said it cost to acquire the equipment or property, rather than the full replacement value.

Consequences of Inaccurate Property Valuations

Underinsured business owners are likely putting their companies at financial risk. When a business doesn’t have an adequate amount of property insurance, the business owner may be responsible to pay the remaining replacement costs when their insurance doesn’t cover the entire claim. These costs can be devastating for a business.
Property owners need to consider the insurance to value (ITV) ratio when purchasing property insurance, which is the ratio of a property’s insured value relative to what it would cost to replace that building. If you hear the phrase 100% insurance to value, it indicates that the insured limit on the policy should track in line with the actual cost to replace.

Best Practices for Accurate Property Valuations

The more information and more detail an insurer has about the makeup of a property allows the building valuation assessment to become more granular and more accurate.
For instance, property owners should disclose any:
  • Protective features, such as sprinkler systems
  • Permanently installed or attached equipment in the building
  • Specialty construction features or building components
  • Warehouses and the value of inventory sitting within them
Companies should also consider one-time costs versus reoccurring costs during a potential loss. For instance, if an operation is down for several months, the company will need to relocate their operations. This means paying rent and electricity bills at an alternative site while still paying the bills for its existing location and the cost of the repairs there. The company will have extra expenses to cover the temporary repairs while they are making permanent repairs to the facility.
Property owners should also let their insurers know of any seasonal inventory fluctuations. If there is a time of year when the company might have twice as many goods as they normally would have, then understanding peak values is crucial if there is a loss.

Accurate Valuations Are Key to Effectively Managing Risk

Companies that fail to provide an accurate valuation of their property and assets put their business at risk for long-term financial consequences. With inflationary pressures persisting and increased global risks, it’s essential that owners partner with insurers to reassess their property valuation each year as part of their overall risk management plan.
For more insight on the latest industry trends, read our 2024 Risk Monitor Report.
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Ryne Carney
Ryne Carney
Head of Property & Marine Product, The Hartford
Caleb Woodby
Caleb Woodby
Chief Underwriting officer of Property & Marine, The Hartford