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Insurable Value Defined

Discussion in 'Commercial/Industrial Appraisals' started by PS111222333444, Apr 13, 2011.

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  1. PS111222333444

    PS111222333444 Sophomore Member

    1
    Sep 2, 2010
    Professional Status:
    Certified General Appraiser
    State:
    Washington
    One of our bank clients is now requiring “Insurable Value” for each building within an appraisal. The Dictionary states that this value is often considered to be replacement (or reproduction cost) plus allowances for debris removal or demo, less deterioration and noninsurable (land?) items. I queried an insurance broker who said their data comes from MSB and is based upon replacement cost new with no factored depreciation. I found conflicting info on AI site and other threads. So, does anyone have a handle on Insurable Value. What else is or is not factored? Landscape/Hardscape, water/sewer lines, conduits, site lighting, etc?

    I'm also somewhat nervous that the client is placing the determination of an insurance product on the appraisal and opening another avenue for liability. Should there be language limiting the use of this value, as in, it's only good for the effective date?

    Thanks for the input.

    Thanks for any input.
     
  2. Denis DeSaix

    Denis DeSaix Elite Member

    173
    May 16, 2005
    Professional Status:
    Certified General Appraiser
    State:
    California
    I've always considered the insurable value to be the replacement cost of the improvement. No EI/EP, just the replacement cost (which includes contractor profit).

    The lack of a standard definition allows the appraiser to define it. Confirm with the client that they want the cost to replace the improvement; if so, then use that to define what "insurable value" means.

    Just use a recognized source to estimate the costs (that source could be local contractors... I'd document who they are if that's who I used).
     
  3. Marion Rhodes

    Marion Rhodes Elite Member

    Top Poster Of the Month

    279
    Feb 26, 2006
    Professional Status:
    Certified General Appraiser
    State:
    Pennsylvania
    I'm not trying to be funny, but,

    You are mandated to follow USPAP. If you don't have compentency with the value they are asking you to appraise, by USPAP you have to turn down the job.

    Do not take liabilities your pocket cannot pay for later. Some work is not worth having.

    .
     
  4. Marion Rhodes

    Marion Rhodes Elite Member

    Top Poster Of the Month

    279
    Feb 26, 2006
    Professional Status:
    Certified General Appraiser
    State:
    Pennsylvania
    Really? I believe USPAP says you must provide the definition and cite the definition. I don't believe that a made up definition is credible for a citation.
     
  5. Denis DeSaix

    Denis DeSaix Elite Member

    173
    May 16, 2005
    Professional Status:
    Certified General Appraiser
    State:
    California
    Marion-

    The client asks for insurable value.
    I ask the client, "what exactly do you mean by insurable value?"
    The client states, "I need to know how much I should have the improvements insured for if I need to replace them. So, I need an estimate of the replacement cost."
    I ask, "Ok, so by 'insurable value' you mean you want to know the replacement cost to make sure your insurance coverage is sufficient to replace the improvement?"
    The client states, "yes".
    I say, "I can do that!"

    In my report I then state that the client requested my opinion of Insurable Value. I define the insurable value as the replacement cost for the subject, for the client to use in its insurance decision-making process. I then provide the that value opinion.

    That's a "made up definition" that isn't "credible"? :mellow:
     
  6. Marion Rhodes

    Marion Rhodes Elite Member

    Top Poster Of the Month

    279
    Feb 26, 2006
    Professional Status:
    Certified General Appraiser
    State:
    Pennsylvania
    The OP is including more than the replacement cost you find in Marshall & Swift or any of the other databases.

    And while you are contemplating it, decide if that includes the foundation, or not, and the total build out, or the standard build out, not to mention damage to driveway and outbuildings.

    .
     
  7. Michigan CG

    Michigan CG Moderator Staff Member Moderator

    217
    Nov 1, 2006
    Professional Status:
    Certified General Appraiser
    State:
    Michigan
    According to the Dictionary of Real Estate Appraisal, Fourth Edition Insurable Value is:

    Now note that the definition according to the institute is REPRODUCTION cost. In typical appraisal Cost Approaches we use a REPLACEMENT VALUE.

    There are significant differences in many properties when considering replacement vs. reproduction.

    Now run a Marshall & Swift Cost Approach on your own home and then go to your policy coverage and see what they have as replacement cost and you will see a significant difference in those two numbers with the insurance agent being significantly higher.

    It is my opinion you can provide this value, with about two pages of disclaimer. I would however charge a significant additional fee to this type of request considering the liability you will incur by opining this value.

    Welcome to your $1,000 basic URAR assignment.
     
  8. Marion Rhodes

    Marion Rhodes Elite Member

    Top Poster Of the Month

    279
    Feb 26, 2006
    Professional Status:
    Certified General Appraiser
    State:
    Pennsylvania
    Thank you Michigan CG.
    This part is the qualifier, whether the landscape and/or personal property is included. This is the domain of INSURANCE APPRAISERS. Just like cars are for AUTO APPRAISERS. Best bet,
    Get an insurance company to go with you and give you a free quote.

    Use their quote for the insurable value.

    .
     
  9. Denis DeSaix

    Denis DeSaix Elite Member

    173
    May 16, 2005
    Professional Status:
    Certified General Appraiser
    State:
    California
    Here's what the relevant part of FAQ #132 says:

    So, the focus of USPAP is to make sure that the definition of value that is opined is understood and disclosed in the report.
    An engagement letter between the client and appraiser can be used for the "source" of the definition.

    So, yes, the appraiser and client can agree to what the definition of value is to be for the assignment (or parts of the assignment). Note that the appraiser isn't "making it up". The appraiser is working with the client to come to a mutually understandable definition that is meaningful to the client for the intended use.
    Defining the value with the client and then stating the definition of that value in the report is USPAP compliant.
     
  10. PL1957

    PL1957 Senior Member

    16
    Jul 19, 2004
    Professional Status:
    Certified General Appraiser
    State:
    Illinois
    We provide insurable values all the time as part of our standard report. Marshall's has a section that lays out pretty clearly what should be excluded when estimating insurable value. It's not a big deal.
     
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