![]() ![]() #Functional replacement cost professional#The statement should be backed up by a professional appraisal and this too should be filed with your insurance company. If the prospect of bearing part of the loss fails to fill you with enthusiasm you should file a statement of value with your insurer. If, for example, a property having an actual cash value of $1 million, insured for $0.7 million, under a contract containing an 80% co-insurance clause, suffered a $0.5 million partial fire loss, the total insurance actually paid to the property owner would then be: #Functional replacement cost full#Thus, the insurance company will not compensate the owner of a property who suffers a partial fire loss, the full amount of that loss, even if the loss is less than the insured value, unless he carried insurance at least equal to the co-insurance requirement. Co-insurance is a device to discourage this practice and is used by insurance companies to limit their own liability. Since 98% of fire losses are only partial losses, it would be possible to underinsure a property, knowing full well that there was little chance of loss in excess of the insured value. A substantial minority of court decisions have arrived at Actual Cash Value by deducting only physical depreciation. ![]() The Cost Approach consists of calculating the Replacement Cost (new) of the building and deducting therefrom the physical depreciation, functional and external (locational) obsolescence. In a perfect world, all three would give the same answer. the Direct Sales Comparison, Income and Cost Approaches. The land value has to be deducted from the market value of the property to isolate the value of the building.Īctual Cash Value may be computed by the three standard valuation methods, i.e. Market Value is the price the property would bring on the open market if sold by a willing seller to a willing buyer. Unless it unduly penalises the insured, the courts usually interpret Actual Cash Value as the fair Market Value of the building. More simply put, it is the current cost of replacing the present building with a new one.Īctual Cash Value has been interpreted by the courts to mean two different things and one insurer advised us that attempting to define it was "analogous to nailing jelly to a wall". Replacement Cost is the current cost of constructing the building on the same site with materials of like kind and quality and for like occupancy without deduction for depreciation. Most types of real property can be insured on either of the following bases: ![]()
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