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FAQ--Frequently Asked Questions about Insurance Appraisals on Buildings

What’s an insurance appraisal of a building? An insurance appraisal determines Replacement Cost. Replacement Cost is an estimate of the cost to rebuild a building, replacing it with one of the same size, shape and materials as the existing building.

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Why do I need an appraisal? Insurance coverage is based on how much it costs to rebuild a building (called Replacement Cost). If you over-insure (buy an amount of coverage that is more than Replacement Cost for your building), you will pay too much for your insurance. If you under-insure (buy less than it costs to rebuild your building), your insurance claim proceeds could be inadequate to replace your building if you had a loss.

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What if I have too much coverage on my building? Excessive coverage costs you additional money and doesn’t help if you have a claim. Example: your building would cost $300,000 to rebuild. You buy $500,000 of insurance coverage. Your building burns down. The insurance company only has to give you $300,000, because that is the Replacement Cost of your building. The additional coverage you bought only enriched the insurance company and does nothing to help you.

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What if I have too little coverage? If you are under-insured, you may not have enough insurance to rebuild your damaged building. Obviously, if you bought $500,000 of coverage for a $1,000,000 building, and it burns to the ground, you can only receive $500,000 of insurance proceeds, not enough to rebuild. Also, if you had a partial loss, your insurance company could withhold a percentage of your claims settlement on the grounds that you had under-insured. This is called a co-insurance penalty.

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Who gets insurance appraisals? Anyone who owns a building can benefit from an independent insurance appraisal: I’ve done insurance appraisals for small businesses, homeowners, corporations, condominium associations, apartment building landlords, hospitals, governmental entities, clubs, hotels, religious institutions, schools and many others.

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I just got a bank or real estate or tax assessment or mortgage appraisal—isn’t that the same thing as an insurance appraisal, and can’t I use that for my insurance? No, an insurance appraisal is very different. It determines the cost to construct a building just like yours on your site. The other type of appraisal determines what someone would pay for your building, the land it’s on, the neighborhood and its amenities. In the profession, an insurance appraisal is called a “bricks and sticks” appraisal, because it considers all of the building’s construction features, but not its possible sale price or tax assessment.

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Why not just let the insurance company tell me what my building's Replacement Cost is? Normally, the policyholder is held responsible for correct Replacement Cost by the insurance contract. Even if the insurer suggests an amount initially, if there is a problem later, they could point to the policy and say 'we are not responsible--our suggestion was just that, only a suggestion.'

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© 2005 C Mikolasy