How Agents Can Maintain Accurate Commercial Property Values for Clients in Today’s Market
DeCotis Specialty Shares:
- How property valuation factors can change quickly, making it difficult to estimate costs year over year
- How insurance-to-value errors can have real-life consequences for clients at times of loss
- How valuation gaps are addressed by underwriters
- How to help clients maintain accurate values and avoid coinsurance penalties
As an insurance agent, it’s never easy to tell a client that their claim will not be paid in full. These types of conversations, however, are becoming increasingly more common in today’s market due to factors like:
- Rising construction costs
- Inflation
- Increased underwriting discipline
Many commercial property clients are finding themselves underinsured because of these trends. In fact, industry data shows that 67% of buildings have an average underinsurance rate of 64%.
Accurate property valuation is a critical component for agents placing Commercial Property Insurance coverage—not just to secure favorable contract terms but to avoid costly surprises at claim time. Problems often arise when it’s too late to correct them, so here’s what agents need to know as they navigate property risks and submissions for clients in today’s market.
Why Accurate Property Values Matter
For insurance purposes, a commercial building’s coverage should reflect the cost to rebuild the structure after a loss, not its sale or purchase price. That’s why replacement cost calculations are challenging: Unlike market value or purchase price, replacement cost isn’t a number that can be pulled from a real estate document.
Static factors such as build year, construction type, and square footage only allow agents to get so far when calculating a property’s replacement cost. Some of the most influential variables fluctuate frequently, making it difficult to estimate costs year over year. This includes:
- Artisan contractor fees
- Availability of materials
- Building codes
- Debris removal costs
- Indirect expenses like consulting, architectural, and engineering services
- Inflation rates
- Labor shortages
- Permit requirements
Because these variables can change quickly, property valuations that were calculated a few years ago may no longer be accurate.
Understanding Insurance to Value (ITV)
Insurance to value (ITV) is a threshold used to measure how closely a property’s coverage aligns with its actual replacement cost. Most carriers expect properties to be insured to a certain percentage of their full value—typically 80% or higher.
When a property is insured for only a fraction of its ITV, the client may be subject to a coinsurance penalty at the time of loss. This reduces the maximum amount they can recover under their policy, broadening the gap in protection and increasing their out-of-pocket responsibility.
For buildings with significant property values, an oversight in coverage calculations could threaten the financial future of a client’s business.
Example: The Real Cost of Underinsurance
Imagine a client's commercial building is insured for $900,000.
It's discovered after a major $500,000 loss that the building's actual replacement cost is $1.5 million. Under an 80% coinsurance clause, the client would be required to carry at least $1.2 million in coverage (80% of $1.5 million).
With an insured value of $900,000, a 75% coinsurance penalty is triggered ($900,000 / $1.2 million). The client can therefore only recover up to 75% of the $500,000 loss, or $375,000 before the deductible.
What Happens When Underwriters Identify a Valuation Gap?
The cost of construction is rising, so ITV is more important than ever. When a valuation gap is discovered, underwriters will generally:
- Require updated appraisals and ITV calculations
- Adjust insured values to reflect current replacement costs
- Rerate the policy accordingly
This process can result in higher premiums for the client, but it helps maintain proper coverage levels and avoid future penalties.
Property Valuation Best Practices for Agents
Valuation issues often arise because replacement costs are generally evaluated every three to five years. This timeline does not support the dynamic nature of today’s inflation rates, which continue to grow at record-breaking levels.
Following these best practices can help agents maintain accurate values, avoid coinsurance penalties, and provide the level of service clients have come to expect:
- Request current appraisals: Although some carriers offer replacement cost estimators, these tools typically provide ballpark figures that are insufficient for larger or more complex properties. A professional appraisal firm often provides the most accurate calculations.
- Review building contents regularly: Construction costs are not the only thing to monitor. Equipment, inventory, and assets may also change over time, impacting a client’s coverage needs.
- Account for inflation: As a general rule of thumb, consider increasing values by 5% each year to help reflect rising costs.
- Provide underwriting with detailed data: Including clear, comprehensive information with a submission will help lead to faster, more accurate underwriting decisions.
DeCotis Provides Specialty Insurance Solutions for Clients’ Complex Property Exposures
Today, accurate property valuation is more than a technical underwriting requirement. It’s a key factor in closing deals and protecting clients from unexpected financial losses.
By taking the time to validate and support property values upfront, insurance agents can help:
- Streamline the underwriting process
- Avoid delays, coverage gaps, and coinsurance penalties
- Deliver better long-term outcomes
DeCotis Specialty offers flexible solutions from AM Best A-Rated markets for a wide range of commercial property risks, including those that may be difficult to place in the standard market. If you’re working on a property submission, especially one that presents challenges, our team is here to guide you through the various coverage options available for protecting clients’ investments.
Get appointed with DeCotis and send your submissions to an underwriter for review.
