Insured value

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:

• Inventory
• Property
• Equipment
• 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.

Examples of Insured value

• For a home, the insured value is usually the replacement cost of the home, not its market value. This means that if the home is destroyed and needs to be rebuilt, the insurance company will cover the cost of rebuilding it, up to the insured value.
• A car's insured value is usually its market value, which is the amount it could be sold for on the open market. This means that if the car is considered a total loss, the insurance company will pay out the amount that it would have cost to buy a similar car in the same condition.
• The insured value of a piece of jewelry is usually the replacement cost, which is the cost of buying a replacement item of similar quality and craftsmanship. This means that if the jewelry is lost or stolen, the insurance company will cover the cost of replacing it, up to the insured value.

Advantages of Insured value

The advantages of having an insured value include:

• Financial protection - Insured value ensures that the policyholder is financially protected against losses due to theft, damage, or other risks.
• Peace of mind - Knowing that an asset is covered helps provide peace of mind and assurance that any losses will be minimized.
• Affordability - Insured value can be less expensive than the full value of an asset, making it more affordable to insure.
• Cost savings - Insured value can help to reduce the cost of repairs or replacement, reducing the financial impact of a loss.
• Flexibility - Insured value can be adjusted to reflect changes in the value of the asset, allowing for more flexibility in coverage.

Limitations of Insured value

• Insured value may not reflect the full cost of replacing an asset. For example, the cost of replacing an item may be higher due to inflation or other factors.
• Insured value may be based on the current market value of the asset, which may be lower than the cost of replacement.
• The insured value may not cover the cost of any repairs or replacements not related to the incident.
• The insured value may not take into account any special features or upgrades that have been added to the asset.
• Insured value may not cover any additional costs such as towing, storage, or overhead costs.
• Insured value may not cover any indirect losses such as lost profits or additional expenses incurred due to the loss.

Other approaches related to Insured value

Insured value is not limited to the maximum amount of money that the insurance company will pay for a total loss of the insured asset. Other approaches related to insured value are:

• Agreed Value: An insurer and the policyholder agree on a predetermined insured value when the policy is taken out, and this value is paid even if the asset’s current market value is lower than the agreed amount.
• Actual Cash Value: This approach is based on the asset’s current market value and is determined by subtracting depreciation from its original cost.
• Future Replacement Cost Value: This approach is based on the estimated cost of replacing the asset at the time of the loss.
• Extended Replacement Cost Value: This approach is similar to future replacement cost value, but it also accounts for increases in the cost of labor and materials that may occur after the policy is taken out but before the loss occurs.

In summary, insured value may be determined in a variety of ways, depending on the insurer’s policies and the policyholder’s needs. Depending on the approach taken, the insured value may be the asset’s cost of replacement, its current market value, an agreed-upon amount, or an estimated cost of replacement in the future.

Footnotes

Insured value — recommended articles

Gross fixed assets — Short lease — Unearned premium reserve — Depreciation rate — Unearned Premium — Annual depreciation — Insurable value — Period of indemnity — Net cost

References

• Heechun L., Hyuntaek L., Donggyun K., Yongtae K., Junseok L., Yongseong K., (2015). Study on the Rate Making Method Based on Insurable Value and Loss Cost of Each Zone(Inundation Depth) "Journal of Korean Society of Hazard Mitigation" V. 15, I. 6, p. 147-157
• Hsu WK., Huang PC., Chang CC, (2011). An integrated flood risk assessment model for property insurance industry in Taiwan "Natural Hazards" V. 58, I. 3, p. 1295-1309.
• 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