Guaranteed Replacement Value

April 13, 2006

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When deciding on the types of fire/hazard property insurance coverage for a small business, an owner needs to consider a number of policy variables.

The small business owner should, when available, obtain guaranteed replacement value property coverage. This may be standard, but usually requires an endorsement. With guaranteed replacement value, the insured is able to replace each item of covered property, at the current replacement cost, under the policy.

If the policy does not provide for guaranteed replacement value, the insured will recover only the depreciated value of the property, which, many times, will be only a fraction of the replacement cost.

Guaranteed replacement cost usually is available in a hazard/fire insurance policy, but unfortunately it's almost never available in an automobile insurance policy.

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Hazard/fire insurance, with liability and property coverage, should always be maintained on real property. When there is a mortgage on the property, the mortgage agreement typically will require the mortgagor/owner to purchase property coverage, and name the mortgagee/lender in the policy as a co-insured.

Generally, the policy limits need to cover only the value of the building, and not the land since it usually cannot be lost to hazards, such as fire. Thus, ordinarily it is not necessary to obtain property coverage equal to the full purchase price of the property. Rather, property coverage should be purchased at the appraised value of the building itself, excluding the value of the land.

Property coverage for a building should always be at guaranteed replacement cost. Generally, guaranteed replacement cost will be available, by way of an endorsement, provided the insured purchases coverage for the building at the building's current value, as of the date of the policy. (Insurance companies use formulas to determine this value).