A Need to Know: Insurance Appraisals

by Adia Walker / Published January 2015

One of the vital parts of association management is to ensure adequate insurance coverage for structures and amenities within the community. To do this effectively, many property managers and board members realize that calling in the experts may be the most effective approach.

According to Ann Marie Cotto from GAB Robins, there has been an increase in the number of associations choosing to utilize independent, third-party insurance appraisals to obtain the values they need for insurance purposes. Experts from two leading companies within the field, GAB Robins and Reserve Advisors, believe that some of the reasons for these recent trends include:

• Insurance appraisals are proven to be the most accurate method in determining the construction cost valuation of the structures.

• The accuracy of a property’s replacement cost is critical toward ensuring a community association is not over- or underinsured.

• A current insurance appraisal helps associations avoid paying too much in insurance premiums and can also eliminate the mistake of inadvertently self-insuring by having too little insurance. When an association is underinsured, property owners run the risk of paying a portion of the rebuilding costs in the event of a loss.

• Economic changes can affect the amount of insurance coverage associations need. For example, construction costs have, in many cases, held constant or decreased due to the economy. An insurance appraisal can eliminate the annual inflation increases in insurance premiums.

• Having an insurance appraisal performed by a quality appraisal company can help to expedite the settlement of a loss in case of a claim.

• An up-to-date insurance appraisal provides accurate values for coverage, eliminating the possibility of a coinsurance penalty in the event of a loss.

“Many insurance policies have a coinsurance clause built into the policy,” ex-plains Cotto. “It is therefore essential that the association base its insurance coverage on accurate replacement cost values. Coinsurance is a provision in an insurance policy under which the policy-holder agrees, at a reduced rate, to maintain insurance equal to a specified percentage of the value of the property covered. If the policyholder fails to maintain that minimum amount of coverage, the coinsurance penalty may be applied.”

In addition to knowing how a coinsurance clause affects the policy, there are a few other topics relating to insurance appraisals that community association managers should understand.

• The difference between the insurable value of an insurance appraisal and a property’s market value. “The most common misunderstanding is basis for the insurable value,” says Matt Kuisle of Reserve Advisors. “Resale price or market values do not coincide with the replacement cost valuations in the appraisal. Property insurance appraisals use what is known as the ‘cost approach,’ which determines the cost to build an equivalent structure. The insurable value in an appraisal does not include the land, hardscapes, landscaping, or other uninsurable items that are excluded from your association’s insurance coverage but may have an effect on the market value of the property. For a vast majority of condominium associations, the insurable value should also exclude the unit interiors.”

• The need to update insurance figures through frequent appraisals. “Community associations need to understand that insurance appraisals are a snapshot in time,” explains Kuisle. “They consider current labor rates and material prices that are subject to change. Florida Statutes require condominium associations to determine the full insurable value (replacement cost) of the property by conducting an independent insurance appraisal every 36 months. Some insurance carriers have similar requirements. Frequent appraisals help boards obtain up-to-date information so they can avoid over- or under insuring the association property.”

• How updates and improvements affect insurance appraisals. “In basic terms, an insurance appraisal is a replacement cost analysis that provides an accurate estimate of the amount of insurance required to replace each structure and amenity insured exactly as it stands on the day the analysis is prepared,” says Cotto. “Each improvement should be built up on a component-by-component basis, which enables the appraiser to accurately value each individual structure, utilizing state-of-the-art software in the preparation of the final analysis.”

After learning the basics outlined above, many property managers and boards make the decision to obtain an insurance appraisal. To determine which provider is the best match for a community’s needs, several questions should be asked. Below, Cotto provides some key considerations.

• How stable is the provider? This can be determined by asking how long the company has been in business. Generally, a company that has been in operation for a number of years has proven itself in the marketplace. 

• How experienced are the appraisers? The appraisers should have a number of years’ experience in construction cost valuation and should be knowledgeable of construction costs data in your specific area.

• Is the provider a large company or a one-man shop? Should your appraiser retire, become ill, or leave the business, there should be a guarantee of continuity of service. In choosing a larger provider, there will always be someone to assist you. When it is time to update your appraisal, the cost is much lower by using the same company.

• What method does the appraisal company use to determine the insurance values? The company should provide a thorough on-site inspection and utilize construction plans for each improvement on the property in order to determine accurate, estimated insurable values. The company should also utilize the best software available in order to provide accurate valuations.

• Will a sample report be provided? As a client, you have the right to see the type of report you will receive. Some companies provide full samples of reports on their websites. 

By looking at a sample insurance appraisal, you will see the scope and depth of the report. 

By utilizing professional services from experts in the field, being knowledgeable about insurance appraisals, and regularly updating insurance policies, community associations can keep up with the changing market while protecting their investments.