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INSURANCE PLACEMENT VALUATIONS AND LOSS PREPAREDNESS

Southeast Appraisal
Southeast Appraisal 3350 Riverwood Parkway Suite 1900-19077 Atlanta, Georgia 30339 Phone: (770) 883-6987 Fax: (866) 839-7887
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An insurance appraisal fulfills three needs: these are independence, placement value data, and proof of loss preparedness. Differing levels and types of insurance appraisals fulfill each of these needs to differing degrees. Addressing each need in turn below: Independence: the insurance company would like to see an appraisal from an outside firm. This is somewhat obvious so that there is not fraud perpetrated by the assured. Some insurance companies now have their own appraisers but nasty loss situations may still occur. Placement: an independent valuation will inform the assured about the amount of insurance to carry. Such an analysis may be completed in great detail with say a +/-10% possible variance or in an overview manner with a +/-20% or greater variance. Be wary, just because the insurance carrier does an insurance placement value analysis, as stated before a very nasty loss situation may occur, with the insurance company denying the proper amount of insurance is carried. It does no good to carry excess amounts of insurance, by design or based upon incorrect value analysis.  Discussions should be held with the insurance broker / carrier concerning what is covered relating to both the buildings (underground piping, foundations, architect’s fees, etc.) and contents (software, engineering and design fees, property of others, etc.).  Relating to both buildings and contents one does not want to be a co-insurer, that is, the assured sharing in the cost of the loss due to being underinsured or worse, being the subject of the co-insurance clause of the contract. Proof of Loss: along with having the appropriate amount of insurance, this is the most important element of an insurance appraisal. Directly stated, if one is not prepared to prove one’s loss instantly 10% of a fair settlement is gone. The strategy is to get a balanced “fair / equitable and timely” settlement. These thoughts are directly linked. One can get a fair settlement say 5 years hence, but it is not timely. Or one can get a timely settlement if one accepts 75 cents on the dollar. Again, not good. One wants the fair settlement at full value in say 6-12 months or whatever time is appropriate for the loss situation, balancing the wishes of “fair” and “timely” is the critcal concept. What is adequate Proof of Loss? The fixed asset accounting record most often is grossly inadequate for a loss situation. Without going into a long explanation, many fixed asset systems contain data that includes intangibles in the values, non-value entries, allocated values from acquisitions, disposed “ghost” assets, transfers in at net book, donated assets, values net of trade-ins, upgrades, and on and on. Various types of detailed diagrams, photographs and movies / videos of specific assets and installations help. Files that have original purchase costs and descriptive detail are wonderful (but rarely are available). Engineering records may help. However, for most facilities / operations the assured is not prepared. Oversight in this regard is strongly suggested.  For those facilities where the appraiser has had the opportunity to prepare a detailed valuation for fair value accounting the information may be very good, at that instant. This assumes that physical verification of the assets in place has been completed, perhaps even interrelated with a “trend and bend” work effort. A sloppy trend and bend job will not provide adequate proof of loss. The information must be kept up to date. The asset listings and value information must be kept up to date either within the fixed asset accounting system or as a separate aside record, incorporating inflation / deflation adjustments, changes in depreciation, if appropriate for the policy /contract form, and additions or deletions. Critical property and casualty insurance thoughts: One may rather deal with the IRS than fight an insurance battle. Understand the insurance policy (”contract”) coinsurance clause where assured shares in the settlement to the extent (say 80% usual) of the insurance that should have been carried. The fixed asset accounting record is not adequate proof of loss. Understand the difference between a Replacement Cost policy and an Actual Cash Value policy. Replacement Cost policies are “repair or replace” often up to Actual Cash Value (a litigious issue, also considering the issues of Market Value, depreciation or betterment). Further, if Replacement Cost, usually the insurance policy (contract) states that Acutal Cash Value will be paid until the covered assets are replaced (language varies per differing forms), then if replaced the full Replacement Cost is paid. Actual Cash Value generally considers the current cost new for the same functional utility, less physical depreciation / deterioration. However in some instances Actual Cash Value is considered to mean the cost of replacing the asset at Market Value (another litigious issue). Being unprepared to prove one’s loss may be extremely costly, particularly if one has not gone through the exercise and cost of perpetually being prepared in advance. The insurance company will not pay for betterments, meaning if you have an old Model A asset and now a Model B is only available you will not receive the settlement for a Model B loss. Check insurance contracts in this regard concerning betterments. The insurance company may well not pay for engineering or intangible assets relating to specific tangible assets. Check the policy and/or discuss this matter with the broker. Understand what the insurance policy says. One can underinsure as well as over insure. A personal note. Are you prepared for a loss at your home? Do you have the proof of value and listing of the assets, or at least photos or a movie of the residence and the contents? Is this information somewhere else other than in your residence? All are encouraged to get prepared for an unfortunate insured event. But imagine in a loss situation how much less of a fair settlement you would receive if such data is not available. Then project this thought into your business situation. 
© Southeast Appraisal Resource Associates, Inc. 2015
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INSURANCE PLACEMENT VALUATIONS

AND LOSS PREPAREDNESS

Southeast Appraisal
An insurance appraisal fulfills three needs: these are independence, placement value data, and proof of loss preparedness. Differing levels and types of insurance appraisals fulfill each of these needs to differing degrees. Addressing each need in turn below: Independence: the insurance company would like to see an appraisal from an outside firm. This is somewhat obvious so that there is not fraud perpetrated by the assured. Some insurance companies now have their own appraisers but nasty loss situations may still occur. Placement: an independent valuation will inform the assured about the amount of insurance to carry. Such an analysis may be completed in great detail with say a +/-10% possible variance or in an overview manner with a +/-20% or greater variance. Be wary, just because the insurance carrier does an insurance placement value analysis, as stated before a very nasty loss situation may occur, with the insurance company denying the proper amount of insurance is carried. It does no good to carry excess amounts of insurance, by design or based upon incorrect value analysis.  Discussions should be held with the insurance broker / carrier concerning what is covered relating to both the buildings (underground piping, foundations, architect’s fees, etc.) and contents (software, engineering and design fees, property of others, etc.).  Relating to both buildings and contents one does not want to be a co-insurer, that is, the assured sharing in the cost of the loss due to being underinsured or worse, being the subject of the co-insurance clause of the contract. Proof of Loss: along with having the appropriate amount of insurance, this is the most important element of an insurance appraisal. Directly stated, if one is not prepared to prove one’s loss instantly 10% of a fair settlement is gone. The strategy is to get a balanced “fair / equitable and timely” settlement. These thoughts are directly linked. One can get a fair settlement say 5 years hence, but it is not timely. Or one can get a timely settlement if one accepts 75 cents on the dollar. Again, not good. One wants the fair settlement at full value in say 6-12 months or whatever time is appropriate for the loss situation, balancing the wishes of “fair” and “timely” is the critcal concept. What is adequate Proof of Loss? The fixed asset accounting record most often is grossly inadequate for a loss situation. Without going into a long explanation, many fixed asset systems contain data that includes intangibles in the values, non-value entries, allocated values from acquisitions, disposed “ghost” assets, transfers in at net book, donated assets, values net of trade-ins, upgrades, and on and on. Various types of detailed diagrams, photographs and movies / videos of specific assets and installations help. Files that have original purchase costs and descriptive detail are wonderful (but rarely are available). Engineering records may help. However, for most facilities / operations the assured is not prepared. Oversight in this regard is strongly suggested.  For those facilities where the appraiser has had the opportunity to prepare a detailed valuation for fair value accounting the information may be very good, at that instant. This assumes that physical verification of the assets in place has been completed, perhaps even interrelated with a “trend and bend” work effort. A sloppy trend and bend job will not provide adequate proof of loss. The information must be kept up to date. The asset listings and value information must be kept up to date either within the fixed asset accounting system or as a separate aside record, incorporating inflation / deflation adjustments, changes in depreciation, if appropriate for the policy /contract form, and additions or deletions. Critical property and casualty insurance thoughts: One may rather deal with the IRS than fight an insurance battle. Understand the insurance policy (”contract”) coinsurance clause where assured shares in the settlement to the extent (say 80% usual) of the insurance that should have been carried. The fixed asset accounting record is not adequate proof of loss. Understand the difference between a Replacement Cost policy and an Actual Cash Value policy. Replacement Cost policies are “repair or replace” often up to Actual Cash Value (a litigious issue, also considering the issues of Market Value, depreciation or betterment). Further, if Replacement Cost, usually the insurance policy (contract) states that Acutal Cash Value will be paid until the covered assets are replaced (language varies per differing forms), then if replaced the full Replacement Cost is paid. Actual Cash Value generally considers the current cost new for the same functional utility, less physical depreciation / deterioration. However in some instances Actual Cash Value is considered to mean the cost of replacing the asset at Market Value (another litigious issue). Being unprepared to prove one’s loss may be extremely costly, particularly if one has not gone through the exercise and cost of perpetually being prepared in advance. The insurance company will not pay for betterments, meaning if you have an old Model A asset and now a Model B is only available you will not receive the settlement for a Model B loss. Check insurance contracts in this regard concerning betterments. The insurance company may well not pay for engineering or intangible assets relating to specific tangible assets. Check the policy and/or discuss this matter with the broker. Understand what the insurance policy says. One can underinsure as well as over insure. A personal note. Are you prepared for a loss at your home? Do you have the proof of value and listing of the assets, or at least photos or a movie of the residence and the contents? Is this information somewhere else other than in your residence? All are encouraged to get prepared for an unfortunate insured event. But imagine in a loss situation how much less of a fair settlement you would receive if such data is not available. Then project this thought into your business situation.