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Insuring Your Commercial Building: Replacement Cost vs. Market Value


We work with several commercial real estate owners seeking to insure their buildings. Whether it is an apartment building, strip center, office, or multi use building, one common question we get is, “my building is only worth $X, why do we need to insure it at replacement cost?”

Market Values and Reconstruction Cost Values rarely align. When we evaluate your property for insurance, we want to understand what it will cost to rebuild it back to its original state. This way, we can ensure that you have enough insurance coverage to reconstruct your property.

Business Insurance policies contain an insurance to value provision called co-insurance. Essentially, the simplest way to explain this is if you do not carry enough insurance on the property, you can get penalized in the event that you have a loss or claim. For this reason, we want to ensure that you have enough property coverage to prevent this from happening.

In addition to this, most losses that occur are partial losses. Suppose you bought your building for $1,000,000, but it costs $4,000,000 to reconstruct it. If you have a claim in the amount of $1,200,000, you’d have a deficiency in coverage and you would not have enough money to rebuild your property.

Building owners do have the option to insure their properties on an actual cash value basis as well. This essentially states that the amount of insurance on your property is equal to replacement cost minus depreciation. Insurance to value provisions can still apply in these situations as well. You still must carry a certain percentage of the true actual cash value of the building.

Give us a call and we’ll work with you to get the right insurance policy on your building. We can be reached at 216-965-0646 or simply, request a quote.

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