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Market Value & Replacement Cost Insurance – CoverLink Insurance



If you own commercial property, it’s important to choose a property insurance policy that fits your specific needs, and understanding the difference between market value and replacement cost insurance is important for anyone who owns a business.

A wide range of insurance options are available at different prices covering an assortment of compensation options. Although there are policies that offer a large amount of financial coverage, depending on the type of property that will be insured, it may make more financial sense to choose a policy that still offers adequate coverage while having lower premiums.

Commercial properties can be covered in a variety of ways, and a number of factors can determine whether your property̵

7;s value goes up or down each year. Knowing how much your property is worth and getting insurance that both protects you and fits your financial needs is important. The following are descriptions of common types of insurance and valuations and the costs they generally cover.

Simply put, market value describes the estimated amount that a property would sell for on the valuation date. Any land included in a commercial property is also part of its market value. The term market value can be used interchangeably with open market value, fair market value or fair value.

A number of factors are taken into account when assessing a property’s market value, some of which cannot be influenced by the buyer, seller or appraiser. These include the location of the property, capitalization rates, rental growth rates, the general state of the property market and more.

The market value is most often used when buying or selling a property. However, it can also be tested when deciding what type of insurance to take out on a property, or the amount of compensation in case of damage.

Replacement cost

Replacement or rebuilding cost is a type of insurance that covers the cost of replacing or repairing a building with materials of the same or comparable quality. For coverage purposes—and unlike market value—replacement cost policies do not include the value of any land and are determined by the amount needed to hire contractors and purchase materials to repair a building or build a replacement.

Theoretically, the replacement cost of a commercial property should be less than its market value, since the replacement cost must only consider building materials and labor in determining compensation. However, the costs of materials and labor may fluctuate. This, along with the many factors that contribute to market value, allows a property’s replacement cost to be higher than its market value.

A replacement cost policy offers great financial protection in the event of a loss, as it does not take depreciation into account when determining compensation. However, it is usually more expensive than other types of coverage and, as a result, may not make sense for every property. Without continuous maintenance and renovations to a property, the value of a building will generally decrease over time. However, the cost of materials and labor to replace a lost property is generally more fixed. Because of this, it may be better to choose a cheaper plan that still protects the operations of your business.

Actual cash value

Actual cash value policies work similarly to replacement cost in that they cover the cost of replacing or repairing a property. However, under a fair cash value policy, there is a deduction in the compensation to account for the depreciated value of the original property.

A property covered by an actual cash value policy will be rebuilt or repaired using modern construction techniques and materials. The difference between this cost and the depreciated value of the original property is only covered by a replacement cost policy and not the actual cash value.

Real cash value generally has lower premiums than replacement cost plans, and they may make more sense for certain types of properties. For example, a store located in a very old building in a popular urban environment will not depreciate as quickly as a new office building located in a business park. The store is more location sensitive and does not require a specific type of building to operate, so an actual cash value policy and its lower premiums may make more financial sense than a replacement cost plan.

Functional replacement cost

Another cheaper option for property cover is functional replacement cost. This type of policy is used when a functionally equivalent building can be found to replace the original property at a lower cost than building a replacement. A building’s functional replacement cost is lower than the replacement cost, resulting in reduced coverage and correspondingly lower premiums.

Functional replacement cost coverage can also be used to repair a partially damaged property with cheaper materials, such as replacing a wall with plasterboard instead of plaster.

The main reason for using functional replacement cost coverage would be to save money with lower premiums, so it can be a good option for properties that use expensive materials that are not necessary for the function of the property or for buildings with intangible value that is not relevant to their commercial feature.

What type of coverage best suits your needs?

The value of a commercial property is constantly changing. Knowing the value of your property and obtaining the policy that best suits your needs will protect your current and future assets. Contact CoverLink Insurance today to evaluate your property’s value and learn more about what type of insurance is best for you.


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