As a business owner, you know your commercial property has value. But how do you establish this value for insurance purposes? Gut feelings aren’t the answer.
For example, if it’s essential to the success of your business, you may see it as “priceless.” If it’s expensive to maintain, you may assume its value is high. If it’s older, you may think it is inexpensive to replace. But these “feelings” can’t establish a true value for insurance purposes. When insuring your business property, it’s important to understand what the property is truly worth, and how this value is determined.
Following are three terms that are often used interchangeably – and incorrectly so. Understanding these different terms may help establish your property’s value and identify the insurance coverage that’s best for you.
- Market value is the estimated dollar amount your property would sell for today, including the land it’s on. This value is affected by location, condition, and the commercial real estate market, and is the value used when selling a property.
- Replacement cost is the dollar amount it would take to replace or repair your building with the same materials used currently; it includes the cost of hiring contractors, but not the value of the land. Typically, replacement cost is lower than market value.
- Actual cash value is the cost to replace or repair your property, less depreciation. This will likely be the lowest value of the three.
Your insurance agent can help you decide which policy best suits your circumstances.