Insurance Replacement Valuation –
An Emerging Appraisal Discipline
Presented by:
Patricia Staebler, SRA
Larry Golicz, Ph.D., MAI
Joseph Magdziarz, MAI, SRA
Sara Schwarzentraub, SRA
Definition of insurance replacement value
The cost of replacement of all improvements to
a property which could conceivably be
destroyed.
www.myrealestatedictionary.com
Definition of insurance replacement value, cont.
Replacement cost of a building for which
standard insurance policies provide indemnity
cover. Insurable value is less than the property’s
appraised market value, because it excludes the
value of land on which the building stands. The
formula for computing the insurable value is
usually stated in the valuation clause of a policy
document.
http://www.businessdictionary.com
Replacement cost is the actual cost to replace
an item or structure at its pre-loss condition.
Conclusion:
Replacement Value = Insurable Value
Therefore the scope of work is to appraise the
improvements “as-is” without the underlying
land value.
However, with one important distinction:
- Flood Value – includes foundation
- Casualty Value (Wind, Fire) – excludes
foundation and about 15% of plumbing and
electric
The 3 D’s
Most often appraisers take on the task to deduct or add
additional items, which are not part of the scope of work. For
example the three D’s:
- Debris removal and demolition are
automatically built into the insurance policy
- Depreciation should never be deducted from
the RCV as the scope of work clearly states to
appraise the “value as-is”.
- The application of depreciation is an
insurance internal decision applied by the
insurance carrier in a payout scenario (ACV vs.
RCV).
Cost approach vs. RCV
- Conventional cost approach deducts
deprecation and includes the site
- An insurance appraisal requests the
reconstruction value of the improvements asis with like-kind material, no consideration of
depreciation and the exclusion of the
underlying land value.
New construction vs. Reconstruction
- The difference between new construction and
reconstruction is approximately 15% as an
industry standard
- It is common knowledge that rehabbing will
always be more cost intense than building
from scratch
- The same is true for reconstruction of partially
destroyed building.
Reconstruction vs. Construction up to code
- Replacement of the structure with
like-kind material at today’s cost”
- “Up to code” is the replacement of
the structure under consideration of
current building codes
USPAP compliance
Many appraisers have the opinion that an
appraisal without the necessity of the highest
and best use is not an appraisal and therefore
do not consider replacement valuation as an
appraisal discipline per se.
Goal:
One of the main reasons for this workshop
is to start a meaningful discussion to reach
consensus in regard to USPAP compliance
of insurance appraisals to protect the
integrity of our profession and to protect
the public from unlicensed and
uneducated providers alike.
Supported Lack of HBU
Because we do not derive a market value in insurance valuation
we do not need to develop the highest and best use.
The lack of the highest and best use is supported and there is no
reason that an insurance appraisal should not be USPAP
compliant in all other aspects.
If we are acting as an appraiser, we are subject to appraisal
standards and ethics.
Cost vs. value
The point most often overseen is the emphasis
on valuation. We do not provide a cost estimate
per se, if we did, we would be cost estimators or
contractors. We are appraisers and provide a
valuation.
Cost vs. value
Like in market value appraisals there are three possible
approaches to estimate the reconstruction value of a
building:
• Software based estimate (Marshall & Swift/Boeckh)
• Construction comparables
• Builder’s and developers data
Cost vs. value
- Reconciling all three sources will provide the
appraiser with a reliable valuation
- Even if the appraiser can only use the software as
basis for the valuation, it is still not entirely a pure
cost estimation, because there are too many
variables the analyst has to input into the software to
derive a valuation
Construction knowledge is essential
-
Basic construction knowledge
Building codes
ISO classification
Zoning
Flood zones
Coastal Construction Control Line
50% FEMA rule
Construction knowledge is essential
-
Construction cost
Constant contact with builders
Site visits of current construction
Search for cost comparables
Marshall and Swift, R. S. Means
When discussing construction cost with
developers, several items have to be considered:
•
•
•
•
What builders include in their cost per SF
Economy of scale
Overhead and Profit
Cost for new construction vs. reconstruction
Insurance Law Knowledge
-
Condominium insurance law
Citizens requirements
Definition of gross building area
Insurable building components
Uninsurable building components or site
improvements
- Lump sums
- Line items (site improvements)
State Law
Florida Statutes 718 regulates condominium associations
and the following paragraph speaks about insurance
appraisals:
• (a) Adequate property insurance, regardless of any
requirement in the declaration of condominium for
coverage by the association for full insurable value,
replacement cost, or similar coverage, must be based
on the replacement cost of the property to be insured
as determined by an independent insurance appraisal
or update of a prior appraisal. The replacement cost
must be determined at least once every 36 months.
State Law cont.
• Although state law requires an appraisal, which
should be completed by an appraiser, the Florida
Department of Business and Professional
Regulation does not regulate insurance
appraisals, due to the same reasons we
mentioned before, lack of HBU and cost vs. value.
• We would like to hear, how your home state
regulates insurance appraisal work and we would
appreciate if you could email this information to
patricia@staeblerappraisal.com.
Thank you for your attention !
We will now open the floor for
discussion on this topic.