Insurable Value

[alex gilbert]

I have my own ideas on this, but I'm interested in hearing other opinions. You are asked to provide an "insurable value" of a property, is this an appraisal under Standard Rules 1 and 2, or is it an appraisal practice for which no specific standard rule applies?

 

[Scott Kibler]

It seems to me that "insurable value" would be dependent on the insurer's underwriting criterea, something a real estate appraiser would not be privy to.

 

[GeorgiaBoy]

I don't know that "Insurable Value" (I've never head that term before) is something that I would have the expertise to determine. Sounds like something that an Insurance Underwriter would determine based off your market value.

 

[alex gilbert]

From the form I'm looking at -

"Insurable Value" means the value of the destructible portions of a property, which determines the amount of insurance that may, or should, be carried to indemnify the owner in the event of loss. For practical purposes, the replacement cost estimate used to calculate insurable value should exclude the foundation.

This estimate is based on "Replacement Cost New" with no depreciation and should reflect only "direct" or "hard" construction costs such as construction labor and materials: repair design/engineering; permit fees; and contractor's profit, contingency, and overhead. It should not include surveys, site development, financing, or land acquisition costs. If Marshall Valuation costs are used, all indirect items (A&E Fees, construction interest, etc.) must be excluded. Marshall's indirect cost items typically constitute about 10% of their estimate.

I understand how to calculate what's being asked for. My question is in providing an "insurable value" am I performing an appraisal, and so must comply with SR 1 and SR 2, or would this be an appraisal practice which is not an appraisal, review or consulting assignment? It's a fine line - but it determines what needs to be included with the insurable value results. If this really is an "appraisal" there's a fair amount of material to include so as to comply with SR 1 & 2.

This brings up another question/issue. Right now for sales & refis the lenders are looking at the Cost Approach in your URARs and using your improvement values to set their insurable values. As the new URAR is phased in these folks are not going to know where to go to get the amount of insurance needed. It may well be that for some assignments we'll be asked to "please don't complete the Cost Approach, but include an insurable value." :blink:

 

[George Hatch]

My question is in providing an "insurable value" am I performing an appraisal, and so must comply with SR 1 and SR 2, or would this be an appraisal practice which is not an appraisal, review or consulting assignment? It's a fine line - but it determines what needs to be included with the insurable value results. If this really is an "appraisal" there's a fair amount of material to include so as to comply with SR 1 & 2.

I'm sure you're familiar with the ideas that there is more than one definition of value and an appraisal assignment can include more than one type of value opinion in it. "Market Value" is but one type of value, "Insurable Value" is another type. If the assignment calls for developing an opinion of "insurable value" the result will be an appraisal and there will be development and reporting requirements for that portion of the assignment.

For example, I include a definition of Insurable Value (along with a reference for that definition) and a separate workup of that opinion of value. It usually takes up no more than about a page or so in a narrative report format. I also modify my report to include references to that portion of the assignment. It doesn't require a whole lot of extra work or extra reporting but you do have to come off of autopilot.

 

[George Hatch]

And in answer to your other question about how clients have basically misused a Cost Approach indicator of Market Value in lieu of a separate opinion of insurable value, that is something I would discourage as an appraiser. If they want insurable value, you should develop one for them and do it up right. A Cost Approach to Market Value is not intended to be the same thing as a Cost Approach to Insurable Value - they're measurements of different types of values.

I should think a separate cost approach addendum for fomr work, modified with a definition of Insurable Value and an explanation of how it was developed, should be very adequate in response to requests for Insurable Value. It also shouldn't take much extra time, once it's set up.

 

[alex gilbert]

Thanks for your response, George. While on one hand I was thinking insurable value could be considered an appraisal, I was also thinking it could be considered just an analysis of reproduction cost which might not fall under SR 1 & 2. I suppose it depends on what you call it.

As far as the lenders using (or perhaps I should say misusing) the Cost Approach, I wanted to point out that assignments on the new FNMA forms will mostly not include the Cost Approach and that's going to baffle some of the processors. It may well be that we'll be called on to provide additional info regarding site and improvement value. It would be kinda ironic to omit the Cost Approach to "streamline" the process then be asked to provide an "insurable value." :rofl:

 

[George Hatch]

While on one hand I was thinking insurable value could be considered an appraisal, I was also thinking it could be considered just an analysis of reproduction cost which might not fall under SR 1 & 2. I suppose it depends on what you call it.

Not to get picky on this or anything, but if it's an opinion of value it is an appraisal, regardless of what anyone else is calling it.

It would be kinda ironic to omit the Cost Approach to "streamline" the process then be asked to provide an "insurable value."

Well, as much trash as I talk about Fannie and their forms I do have to give them their due. By making these changes they have basically circumvented their corresponding lenders from misusing the Cost Approach to Market Value. I'm not entirely sure this doesn't fall under the category of unintended consequences, but now when a lender wants Insurable Value they'll have to ask for it separately. Hopefully appraisers will realize that "Insurable Value" is an additional value opinion that requires it's own role in the scope of work be addressed, even if it only takes a few minutes to do so.

 

[Mary Tiernan]

My other income producing job is an insurance inspector for a large firm out of Ohio.

I am sent to the house to take measurements, and answer some questions on their form.

The firm has a program which calculates insurance value for their clients.

Interestingly, the measurements for insurance value and appraisal value are QUITE different. For example, a bi-level is considered a two story on a slab, due in part to the quality of finish for a bi-level house and the cost to replace. Square footage is calculated by completely different methods than ANSI.

Secondly, insurance values take a lot more into consideration than just square footage, bathroom count, and exterior features. For example, a "stoop" with no roof is not considered and is not to be measured, yet, any area with a roof similar to that of the rest of the house is evidently calculated at a higher cost than just a deck. Patios are not included at all.

Also, distance to fire hydrants, responding stations, and adjacent structures and other factors are carefully examined.

If someone wanted me to perform a cost approach for insurance value, I would have to consider myself not adequately trained to provide that information., and would suggest a professional in that area be consulted. "These services are available for a fee, and are recommended." The insurance value of a structure can be higher or lower than the cost to replace depending on the location, etc.

 

[Peter LeQuire]

ISTM that if someone asks an appraiser for an opinion of value, it's an appraisal - it doesn't matter how "value" is parsed. If it's an appraisal USPAP applies.