The What and Why of Replacement Cost Valuations

By David Kolodzik, PPIA, CRVS / Published April 2019

Most property managers know about or have heard of replacement cost valuations or insurance appraisals. However, many do not realize that it is a Florida law that all residential condominium associations must have them done at least every 36 months. They also have not been informed why they are required.

     After the destructive hurricanes of 2004 and 2005, the State of Florida saw that many condominium associations were not insured for the correct amount to replace them if a total loss were to occur. Unit owners who thought their association had purchased adequate insurance coverage realized that, in fact, they were underinsured.

     In 2007 the Florida Legislature made it a law that all condominium associations must have a replacement cost valuation conducted at a minimum of every 36 months—F.S. 718.111(11)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.

     There are different types of replacement valuations that should be conducted based on differing coverages for various types of insurance policies. For example, the association is responsible for different components of the building for a hazard/wind policy versus a flood policy. Therefore, there should be two distinct valuation reports and amounts, showing the association’s coverage responsibility for coverages on each of these types of insurance policies.

     For the hazard/wind coverage, the association is required to have insurance coverage on the entire exterior structure and many interior additions and components, such as the wall structure and sheetrock. The individual unit owner’s insurance should cover wall, floor, and ceiling treatments (paint, wallpaper, carpet, tile, and so on).

     For a flood policy, the association’s insurance policy is responsible for it all. This includes the wall, floor, and ceiling treatments inside the unit. Of course, it would not provide coverage for the unit owner’s contents—they would still need to insure those separately.

     Another type of valuation report that has come into play is the “Law and Ordinance” valuation. Where the traditional type of replacement valuation reports takes into consideration the current structural components of the building, the Law and Ordinance value is what the cost would be to rebuild the structure to the current building code. If the structure has major damage, it might be required to carry out a complete upgrade to current code standards. This is very important to consider especially if the building is older—prior to major code changes. By providing this information in the valuation report, the board and their insurance advisor will have the needed information to make important decisions in regard to their coverage.

     Besides the structures, the report should also include valuations on site additions. This might include swimming pools, tennis courts, fencing, or seawalls. Knowing what the costs would be to replace these features assists not only in determining the amount of insurance required but also in having a base amount for the association’s reserve studies.

     By having replacement valuations completed on a regular basis, the association does not have to worry about facing penalties for failing to comply with a state statute. Also, in the event of a claim, the insurance carrier can impose the co-insurance penalty [penalty imposed if the insured value is below a specified percent of the actual replacement value] if the association does not have the proper coverage in place. Even though the State requires these to be completed every 36 months, many associations have now opted for having them done annually. This is because of the constant increase in construction costs in Florida.

      Although homeowner associations are not currently required under F.S. 720 to have these valuations conducted, many do anyway. Many components of the homeowner associations, such as pools, community centers, fencing, light poles, docks, and gazebos—should have regular valuations to make sure these site additions maintain the correct amount of insurance coverage.

     It is the fiduciary responsibility of the association board, whether it be condominium or homeowners, to protect the property of its members. By having replacement cost valuations conducted on a regular basis, all of these assets have the proper protection.

Dave Kolodzik, PPIA, CRVS

President of Expert Inspectors Inc.

Dave Kolodzik, PPIA, CRVS, is President of Expert Inspectors Inc., a Florida licensed insurance adjuster, and a certified replacement valuation specialist. He has been conducting insurance inspections and valuations throughout Florida for 17 years. For more information on Expert Insurance Valuations, call (866) 480-8236 or visit www.flinsurancevaluations.com.