Insured value is the highest (maximum) amount of money that the insurance company will repay if the insured asset is considered to be a total loss. The insured value of an asset may be its cost of replacement or its current market value, it depends on insurer policies. Insurance can cover the following:
- Business income
In terms of property insurance, it can cover both the physical outside as well as the inside, with the contents of the building e.g. machines. It is important to distinguish the difference between replacement cost and insurable value. Replacement describes the cost of putting back in place items of the same time and value whereas the second informs about the maximum amount of money the insurance company will pay in the event of total loss. Therefore, the cost of fixing or replacing damaged goods can be significantly higher than the insurable value.
Total insured value meaning
The total insured value is a term used to clarify the total amount of insurance available in a single loss in commercial real estate policy. The total insured value is usually determined by adding the value of the property, the business interruption value and the value of any existing property in the same location. It is typically used and found in major commercial real estate insurance policies and can be calculated based on a single location basis or can be calculated in multiple locations. In the case of general commercial real estate insurance policies, the total value of insurance is often used to determine the liability limit for a policy based on the location with the highest total insured value, which becomes an available limit in all locations. Statement of values is one of the most useful tools for determining the total insured value. Total insured value is often referred to as TIV.
Determining the maximum insurable value
To determine the total insurable value, it is necessary to conduct a full inventory check and provide insurer with the sales records that will help determine the total value of the property or the business in general. It is greatly important to take under consideration all the critical factors and items that are essential for running the business. The total insured value (TIV) is calculated by aggregating the total value of the property, equipment, stocks, tools, etc. at each location and combining it with the final number calculated based on completed business income worksheet. A business income sheet is a document provided by an insurance broker. It is used to estimate the company's annual income from activities for the upcoming year in order to choose the insurance business income limit. The selected percentage or multiple of the estimated annual income for the nearest 12-month period should be based on how much time the replacement of equipment and resume of business activities would take in the worst case scenario. In some cases, the period mentioned above may exceed 12 months. Most insurers require a completed business income journal as a condition to activate the option to cover the agreed business income.
- Jaffee D., Kunreuther H., Michel-Kerjan E., 2010, p. 167-188
- Hsu WK., Huang PC., Chang CC, 2011, p. 1295-1307
- Heechun L., Hyuntaek L., Donggyun K., Yongtae K., Junseok L., Yongseong K., 2015, p. 147-157
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- Jaffee D., Kunreuther H., Michel-Kerjan E., (2010). Long-Term Property Insurance "Journal of Insurance Regulations" V. 29., I. 7, p. 167-188
- Michel-Kerjan E. O., (2010). Catastrophe Economics: The National Flood Insurance Program "Journal of economic perspectives" V. 24. I. 4. p. 165-186
- Mishra K.C., (2005). Insurance Demystified - Reading Beyond The Lexicon p. 133-208
Author: Jan Kaptur