Insurance Valuations Vs Reserve Studies


Are you looking to buy a condominium or timeshare? If yes, it is important to know what an insurance valuation is. Let’s take a look at the subject for a quick overview.

What is an insurance valuation?

An insurance valuation (also known as an insurance appraisal) is a third-party, objective assessment of the property’s replacement costs for insurance purposes. This report can be used to guide the board members and their agent in determining the right amount of insurance coverage. It is not to be confused by a real-estate appraisal, which provides a fair market price for the property that includes land.

These elements should be included in the study in a clear and easily understandable format.

* Statement of terms & conditions* Report definitions to clarify
* Summary of the total complex values
* The values of each structure
* Exclusions for insurance
* Depreciation values

Why do we need an insurance valuation?

1. Florida State Statute 718.111 states that condo associations must have insurance to replace their value. This can be done by obtaining an independent appraisal or updating a prior appraisal, and it must be done at least once every 36 months.

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2. The Insurance Valuation calculates the replacement cost of each structure within the complex. This insurance valuation ensures that adequate insurance coverage is in place to protect against loss.

3. This valuation documents the board’s accountability in regard to stewardship, fiduciary and financial responsibility for condominium property.

This sounds a bit like a reserve study, doesn’t you think? They are both giving you replacement cost. Owners who have community elements on their property often ask this question. But the answer is no.

These reports, despite having the same components in the reserve study and the insurance valuation, serve different purposes.

This will show you how much insurance you need in the event of damage to your property. It should be done every year so that adjustments can be made. The reserve study, on the other side, details the cost of each component’s replacement in the future based on its age and usage. Let’s take a look at the basics of the reserve study to make it easier for us to compare.

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What is a Reserve Study and how does it work?

A Reserve Study is a financial and technical analysis of community assets in a common interest development. These elements should be included in an easy-to-understand format.

Details and inventory of components
Inventory’s remaining useful life
An estimate of the current replacement cost for each component
A review of the current financial situation of the association
A funding model summary
Funding recommendations, including a projection for 30 years
Appropriate disclosures

Both the American Institute of Certified Public Accountants and the Community Associations Institute have published guidelines that outline minimum requirements for a reserve study.

Why do we need a reserve study?

1. The Reserve Study establishes the schedule for funding major components of common areas.

2. This funding schedule gives property owners assurance that the funding they need to maintain their property will be available.

3. The community members can be assured that their investment will be increased over time by a fair and systematic approach to building up the replacement reserves.

4. The reserve study, which is well-prepared and managed by those in charge of governance and management, is an indispensable management tool. It provides community Boards and managers with the information needed to engage in long-range planning and the advance scheduling for major component repair and replacement.

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5. The Reserve Study is a historical written record that documents the accountability of past managers or boards of directors with respect to the stewardship and management of reserves and assets of associations.

6. Only a thorough and credible Reserve Study can ensure that dues paid by members of the community are the result a fair reserve funding program.