Rising inflation affects nearly every aspect of everyday life, from gas prices to what we eat for lunch. Staying on top of these day-to-day costs can distract us from the ways that inflation affects us indirectly – such as the impact of inflation on property valuations and insurance coverage.
What is Property Valuation?
Property valuation seeks to place a dollar value on a property. This value is then used for various purposes. For instance, when you know the approximate value of your business property, you can make more informed choices about the proper limits for your insurance coverage.
Property valuation considers both real property and business personal property. Real property includes land, buildings, and fixtures that cannot be removed, such as a well. Business personal property covers easily-moved items, like desks and computers.
How does property valuation affect insurance coverage?
Insurers calculate the value of the business property (both real and personal) in two different ways:
- Replacement costs. Replacement costs calculate how much it will cost to replace the current property with comparable new items. For instance, the replacement cost of a building examines what it would take to rebuild that building if the current building was destroyed.
- Actual cash value (ACV). Also known as “actual cost,” ACV calculates how much an item is worth right now, in its current state. For example, a ten-year-old desk will have a lower ACV than a brand-new one due to age and wear.
It’s tempting to insure the business property for actual cash value, because the resulting premiums are often lower. Yet inflation presents a strong argument for insuring property at its replacement value.
How can I make sure I have the coverage I need?
As inflation pushes costs upward, the gap between what your insurance will provide and what it will actually cost to repair or replace damaged property grows wider. Insurance that offers actual cash value of decades-old equipment, for instance, may fall far short of providing the coverage needed to buy new versions of the same equipment – especially when inflation has pushed the costs of new equipment higher than ever.
Need help adjusting your insurance coverage?
Talk to the team at Odell Studner today. We’ll help you ensure that you have the insurance you need for the risk your property faces.