by Karie Martin
Due to the economic slowdown, real estate values in many places in the country have dropped. As a result, some of our clients have asked whether they should reduce their property insurance limits to mirror the drop.
The answer is, it depends.
If you have replacement cost coverage on your buildings, signs, contents, etc., you probably should not lower your property insurance limits. In 2008, despite the economic issues faced by the country, costs to rebuild actually increased according to the Insurance Services Office. Because replacement costs are primarily driven by estimated rebuilding costs, it’s important to leave the insured value either where it is or increase it to today’s actual replacement cost. During the storms of 2008, we found many more of our clients to be underinsured, than overinsured.
If you have actual cash value coverage on your buildings, signs, contents, etc., you may want to consider lower your insured values. Actual cash value coverage covers the depreciated cost of your property. One more year of depreciation on top of a time of deflated values may mean that lower insurance limits make sense.
As a general rule, you should carry replacement cost coverage when (1) you have a building newer than 20 years, (2) you want/need to rebuild or repair the building if it is damaged, and/or if (3) your lender demands replacement cost coverage most lenders do.
You should consider actual cash value coverage when (1) you have a building older than 20 years, (2) you do not want/need to rebuild it if it is damaged, and (3) if there are no interest holders such as minority partners or lenders who demand replacement cost coverage.
Karie Martin is Senior Account Manager with Mobile Insurance Agency in Woodlands, Texas.