03.03. Property Valuation Methods

Card Set Information

03.03. Property Valuation Methods
2013-03-19 18:32:13
Property Valuation Methods

Property Valuation Methods
Show Answers:

  1. Most common valuation method
    • ACV (actual cash value): cost to replace property with new property of like kind and quality less depreciation
    • replacement cost: cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation
  2. Actual Cash Value
    • (+) most prevalent method
    • (+) supports the principle of indemnity
    • can use replacement cost minus deprecation
    • can use market value
  3. Accounting depreciation and economic depreciation
    • accounting: property is expected to have a useful life and is depreciated over that period; most common method is straight-line
    • economic depreciation: difference between replacement cost and current market value (results from physical / functional depreciation)
  4. Market Value
    • used by many court as ACV definition
    • difficult to establish if there have been few recent transactions involving comparable property
    • market valuation: analyze similar transactions (antiques, etc.)
    • market value of real property: reflects the value of the land and its location + buildings; most insurance policies don't cover land, so it's removed when establishing insurable value of property
  5. Broad evidence rule
    • a court ruling explicitly requiring that all relevant factors be considered in determining ACV
    • factors include: obsolescence, present use and profitability, alternate building uses, present neighborhood characteristics, long-term community plans, inflation trend
  6. Replacement cost
    • ISO HO-3: if ins value is 80%+ of replacement cost - pay lower of liability limit, replace cost, repair cost; else pay lower of limit, ACV, repair minus depreciation
    • to reduce moral hazard, most replacement cost policies pay out only after the insured has actually replaced the damaged property
    • ACV settlement option: offered so the insured can start repairing, and then has 180 days to refile claim on replacement cost basis
  7. Non standard valuation methods
    • agreed value method: watercraft, antiques, etc. Agree on maximum amount paid in case of total loss
    • functional valuation method: insurer is required to pay no more than the cost of repair or replace with property that is its functional equivalent (eg. schoolhouse turned into office, computers, building material)