The Valuation Gap: Obstacle or Opportunity?



Not surprisingly, insureds’ misunderstanding of these terms frequently causes them to establish incorrect values. In this context, use of the word “guesstimate” is particularly appropriate because insureds are providing values based upon mostly stale data. (How many brokers can say that all of their clients have current property appraisals or valuations? How often do brokers see their clients use acquisition costs for property values?)

As I suggested earlier, the insured’s misunderstanding of terms is often exaggerated by the time constraints imposed by the renewal process. In most cases, they merely guess. There are, however, a number of things brokers can do to help their clients avoid the “valuation gap:”

1. Explain Valuation Methods

First, make sure that the client understands the various valuation methods. Once that is accomplished, they can begin to consider which method best suits their needs. Both of these steps must be taken before any decision on values is made. Then the insured should look to their available resources to assist in a correct valuation of properties.

2. Don’t Forget the Coinsurance Clause

Another fundamental mistake a client can make is failing to comprehend the meaning of the coinsurance clause and penalty that can result when values are understated.

Basically, the coinsurance clause is the protection the underwriter inserts into the insurance contract penalizing the insured for deliberately underreporting values to control their premium expense. What most insureds don’t understand is the fundamental relationship between policy limits and property values. The result, in effect, is that underreporting values results in inadequate limits, and therefore a coinsurance penalty. The formula is:

Ins. carried ____________ Ins. required x loss = reimbursement

The solution, of course, is to:

3. Make Sure the Business Interruption Worksheet is Factual

A third serious mistake often occurs in the completion of the...


Actual Cash


Replacement Cost

Reproduction Cost

Agreed Value

Selling Price/Market Value


The cost to repair or replace damaged property; less real depreciation.

The cost to repair or replace damaged property with new materials of like kind and quality, or to provide a substitute unit of equivalent utility, without deduction for depreciation.

The cost to reproduce damaged property using identical or equiva- lent materials and techniques, to the extent available.

Fixed amount payable in the event of total loss to property.

As in the case of finished goods inventory.


Should be considered for build- ings that will not be replaced in the event of a total loss. (Problem with partial loss.)

Appropriate for most properties.

Should be considered for historic buildings.

Appropriate for difficult-to-value items such as fine arts.

Used for valued finished materials.