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Insurance Valuation

Insurance valuations are routinely requested by lenders, property owners and insurance companies. Accurate information regarding replacement cost provides assurance to all parties that adequate insurance is available. Insurance Valuation can guarantee the property owner has adequate insurance and is not paying for excessive coverage. A property loss can be a devastating experience even when fully insured. Incurring a loss when inadequately insured can cause financial disaster. Casualty insurance costs rose sharply after hurricanes Katrina and Rita, particularly in the Gulf Coast area. Property owners are more acutely sensitive to the cost of insurance as a result of rate increases which occurred after hurricanes Katrina and Rita. Those who suffered a loss are also more aware of the level of coverage. Insurance valuations are obtained by some property owners in an attempt to minimize the costs of property insurance. Other owners obtain insurance valuations to make certain that adequate insurance is available in the event of a casualty.

Insurance Valuation provide evidence regarding replacement cost. Insurance Valuation confirm casualty insurance coverage is adequate to rebuild the property in event of a casualty. The insurance valuation provides an objective estimate of the replacement cost to rebuild the property, the valuation supplies you the values to allow you to set your insurable values at the proper and appropriate levels. Since construction costs have increased sharply in recent years, replacement costs have changed materially in the last few years. Costs for construction components have vacillated, such as the price of lumber. Other costs appear to have permanently increased due to rising demand overseas for raw materials. This includes items such as steel, copper and concrete. However, a substantial reduction in single-family construction in the United States may cause a reduction in the market price for some of these commodities.

Purposes of insurance Valuation include making the following parties comfortable insurance coverage is adequate:

  • Insurers
  • Lenders
  • Owners
  • Limited partners
  • Tenants

The objective of an insurance valuation is to provide adequate funding to replace the physical property destroyed by a loss. This would include the structure. However, damages for lost rents are not part of an insurance valuation analysis, though they can be insured as an additional expense or business interruption. Insurance Valuation are prepared by calculating the cost to replace the existing property, including items which would be destroyed by a casualty. An insurance valuation would typically focus on replacement cost instead of reproduction cost. Insurance addressing reproduction cost is atypical. Replacement cost is the cost to build a replacement building which is functionally equivalent to the subject property. Reproduction cost documents the cost to build an exact duplicate. The cost of site preparation, paving, sidewalks, underground utilities, and foundation would not be included when calculating replacement costs in the insurance Valuation. These costs are not included since it is assumed costs for these items are not necessary to rebuild the subject property. If you have issues such as code compliance and changes in zoning laws, you may need to consider replacement cost as your basis of value. Appraisers would visit the site and document the quantity of improvements and type and quality of construction materials.There are several options for calculating replacement cost. The square foot method provides an estimate of values based on the overall building size and utility. The segregated cost method actually calculates the cost of the individual building components and rebuilds the building piece by piece. The option you choose depends on both your needs and the complexity of your properties. Replacement costs are developed from the combination of construction costs manuals and/or interviews with developers, lenders, and builders.Appraisers typically focus primarily on construction costs manuals to develop a preliminary opinion of replacement cost. Discussions with real estate professionals are used to review the accuracy and reasonableness of data in the construction cost manuals. Since most buildings are insured on a replacement bases, the "cost approach" used in a traditional appraisal may not meet your needs.

Accurate replacement cost data can ensure the insurer, lender and owner are adequately protected in event of a casualty.

O'Connor & Associates staff complement of over 50 real estate professionals includes 12-15 senior staff members who can complete an insurance Valuation. They can also handle other due diligence tasks. These professionals are supported by an experienced staff of over 100 who are accustomed to complex assignments. Our team has experience in all aspects of real estate including acquisitions, due diligence, ownership, appraisal, property tax appeals and dispositions.  Reduce your risk and stress by utilizing O'Connor & Associates' breadth and depth of experience to evaluation your real estate investments.

To obtain more information on O'Connor & Associates' insurance certificate services, Larry Brewster at 713-686-9955 or fill out our online form.

About Patrick O'Connor
Pat O'Connor, MAI is president of O'Connor & Associates, 180-person firm in business since 1974. O'Connor & Associates is the largest tax consultant in Texas, handled more than 70,000 administrative appeals in 100 counties in 2006 and is currently coordinating over 2,000 judicial appeals. O'Connor & Associates also provides real estate appraisal, cost segregation and market research services. For more information, visit www.poconnor.com or e-mail Patrick O'Connor at poconnor@poconnor.com.

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