When market values are falling, property owners find themselves in a quandary about how to provide exact replacement cost values to insurance companies. Given the current economic climate, it makes no sense that the cost of rebuilding your building has increased over the past 15 months. The fixed costs of supplies that are not declining are something many owners neglect to consider.
Many valuation trending services can be used to track percentage increases in building replacement cost values year after year. While some insurance companies have their own systems, others will rely on brokers and clients to use Marshall Swift. They then compare the increased prices with what is available in the market. Insurance companies often require property owners to evaluate their properties and adjust their building value accordingly.
Owners have made a number comments over the last year saying that it isn’t sensible to increase the value their buildings by an inflation factor. This is because the building’s current replacement cost is no longer sufficient. First, an insurance underwriter will only consider the cost of rebuilding the building today. They don’t pay much attention to its market value. It may be a good idea to talk with your broker about how the property could be altered or rebuilt in the event that it is damaged. Sometimes rebuilding may not be an option due to a variety reasons. In these cases, Actual Cash Value might be a better approach. Normally, Actual Cash Value is the replacement cost minus depreciation.
If you are not satisfied with the replacement price value used, an alternative is to request a replacement cost appraisal from an appraiser licensed within your state. This is a procedure that allows you to get a replacement cost estimate. This will incur a fee and take some time to gather the necessary documentation and show the appraiser the property. This is the most accurate method to gather that information. It could also be done annually, if the owner so desired. It is possible to schedule an appraisal every five to ten tones and then use an inflation factor that is reliable to the insurance companies.
Marshall Swift provided an inflation factor of 4% to 6% for properties within the Puget Sound region in early 2009. The factors, which are published every quarter, were down to a range of less than 1% to as high as 2.5% by June 2009. This varies depending on where you live and what construction.
As we mentioned, fixed costs have not changed which is what drives many inflation factors. For example, scrap steel cost $230-$235 per tonne in December 2008. In September 2009, it cost $315-$325 per tonne.
According to various valuation sources, the Pacific Northwest averages were trending factors in October 2009:
- FM Global 3.08%
- RS Means Negative (-2.0%), and
- Marshall & Swift (Negative) -2.25% (which represents the US average).
This isn’t a scientific method. Market conditions constantly change and the information changes. Many predictions have been made for 2010, that the trending factors in commercial buildings will be (Negative), -5% to +5%.
It is important to remember that you should evaluate the current cost of replacing your building during an insurance renewal cycle. It is worth asking your broker for assistance if you are not certain how your building was originally constructed.