Insuring your business property: replacement cost and actual cash value

Two important values when it comes to insuring your business property: replacement cost and actual cash value.

As a business owner, you may be aware that there are four values attached to your building.

Two of them include both the building and the land:
Demand Value – what someone is willing to pay you for it today
Assessed Value – assigned annually by the government and used for tax purposes

The other two are related to the building value only:
Replacement Cost Value – what it would cost to replace the same building with materials of like kind and quality
Actual Cash Value – the depreciated value of the building considering its current age and condition.

For insurance purposes, only the latter two are important and the one you choose depends on whether you would replace the building if it were destroyed by fire or some other peril like an earthquake or flood.

Replacement Cost: YES, to rebuild

When the goal is to put the building back up after it has experienced a total loss due to fire or another disaster, you should purchase replacement cost insurance. However, if you want to build it in a different place, then you must be careful because most insurance policies have a “same site” clause. This means the building you put back up must be on the same site with materials of like kind and quality. If you want the building to be built at a different location, you must have the “same site” clause removed.

Actual Cash Value (Depreciation Value): NO, to rebuild

Insuring a building for its actual cash value means your intention is not to put it back up should the building suffer a loss by fire or other disaster. In this case, you want to purchase the actual cash value rather than the replacement cost because it is more efficient than the replacement value.

To qualify for replacement or actual cash value, you must prove your loss. For buildings, the best way to do so is by providing a professional appraisal. This independent valuation assists you in deciding what value to insure for and takes the guesswork out of determining how much the building is worth when a claim occurs.

Hire a qualified appraiser

The gold standard for determining a building’s replacement cost and actual cost value is to hire a qualified appraiser to perform an appraisal. Request a replacement cost and actual cash value so you can choose the appropriate one for your business.