Resources & Insights

Insurance Companies Step Up Scrutiny of Property Valuations

March 11, 2020

Brian Parks,
President, Commercial Lines

Commercial real estate investors and owners take notice: insurance carriers nowadays are paying much closer attention to property valuations.

Why the heightened due diligence?

Simple: carriers hate having to pay claims on a building that was valued at “X” dollars when it issued their policy but is now suddenly valued at the higher “Y.”

A succession of catastrophic events – think hurricanes Harvey, Irma, Maria, Florence and Michael in 2017 and 2018 – prompted insurers to step up their scrutiny of valuations.

And although it’s fraudulent to do so, owners on occasion have been known to fudge the value of their buildings to try to save money on their policy premiums. Underwriters, of course, do their best to avoid this sort of thing, if only to save their jobs. Insurers don’t take any of this lying down.

The trials and tribulations of the Caneel Bay resort in the Caribbean offer a good case in point. The property was hard-hit by Hurricane Irma in 2017 and tried to collect $64 million to pay for the damage. Its insurer, however, paid it just $32 million – the limit of the coverage acquired by CBI Acquisitions, the owner of the property. The parties are now in arbitration – and the resort remains idle, with little chance of reopening any time soon.

The problem isn’t limited to commercial properties.

A report last year from CoreLogic looked at home valuations in four disaster-prone regions and came to an alarming conclusion. “Underinsurance issues can cause financial devastation for property owners, artificially low coverage limits for insurance carriers, and increased loan delinquencies,” said Amy Gromowski, senior leader analytics at CoreLogic.

For homeowners, the underinsurance problem is typically the result of climbing home prices coupled with rising labor and materials costs, not the result of reporting a false value to insurers.

Although knowingly under-reporting the value of a property can be grounds for the denial of a claim, insurance companies know they can sometimes lose those fights. To protect themselves, they will sometimes impose margin clauses that limit the amount they’ll pay in the event of a loss to a specified percentage of the value reported by the policyholder.

Now that insurers are taking a harder look at property valuations, owners and their risk managers need to be sure they can provide the details behind their valuation methods.

Underwriters will want assurance that the owner understands how important accurate values are to the process of pricing and placing coverage. That means they’ll have questions about items like occupancy rates, lease terms and just about anything else related to the financial health of the owner.

Given the extra attention being paid to valuations, it’s a good time to pull out your policy and review whether your building is covered by a “replacement cost” or “actual cash value” policy.

Replacement cost refers to the amount it takes to replace damaged or destroyed property with new buildings, equipment and furnishings. Actual cash value, or ACV, is the replacement cost of property, less the accumulated depreciation for age and wear.

Even though it could be a bit pricier, insuring your property at replacement cost is the better route because any savings you achieve with an ACV policy would be quickly wiped out in the event of a major loss.

It’s also a good idea to add a “building ordinance” endorsement to your property policy. Such endorsements pay you the cost of repairing damaged building to meet the current levels of local building codes, which may have changed since your building was built.

Finally, there’s no doubt property valuations have climbed over the past decade or so thanks to the economic expansion. But if you haven’t provided your carrier with an updated appraisal of your portfolio any time recently, we’d suggest there’s no time like the present.

Brian Parks is the president of CCIG’s Commercial Lines department. Reach him at or at 720-330-7923.

CCIG is a Denver-area insurance, employee benefits and surety brokerage with clients nationwide. We do more than make sure you have the right policy. We help you manage your long-term cost of insurance with our risk and claims management expertise and a commitment to service excellence.

Also readA Missing Element in M&A Due Diligence

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