Insurance appraisals 101  

Every property manager and board member should recognize the need to provide proper insurance coverage for their association. Insurance appraisals are often used to provide replacement cost values to accurately insure the property. Many managers and board members have some basic questions regarding what insurance appraisals are and what they contain. The purpose of this article is to answer some of the most frequently asked questions about them.

It must be understood exactly what an insurance appraisal is. In basic terms, it†is a replacement cost analysis that provides an accurate estimate of the amount of insurance required to replace each structure and amenity insured exactly as it stands when the report was prepared. It should provide both a hazard and flood insurable value (if the association is located in a flood zone). Simply defined, the hazard valuation is used by an insurance company to determine the Insurable Replacement Cost of a building if it is damaged by perils other than flood (e.g., fire, windstorm, pipe breaks).

Although most property managers and board members are familiar with hazard coverage, there seems to be several questions regarding flood coverage. It must be noted that the insurable values for flood coverage are higher than for hazard. The reason for this difference is that most insurance companies do not include coverage for the foundations or unit interiors. FEMA, which regulates most flood coverage policies, usually recommends the inclusion of unit interior finishes and foundations in the insurable value.

Everyone is aware of the flood damage that can be caused by storms or hurricanes. The fact that the heaviest damage done by storms is not due to rising water but storm surge that can damage the foundation of the structure is not always recognized. There have been cases where the building seemed to have survived the storms, only to have building inspectors discover foundation and structural degradation so severe that the building had to be demolished and rebuilt. The flood policy written through NFIP does provide coverage for the foundation, not just the lower floors.

Why should a condominium association have an insurance appraisal performed for their property? The primary reason is to accurately inform the property manager, board, insurance agent and unit owners of the correct amount of insurance coverage needed to replace the structures on the property in the event of a catastrophic loss. Without an appraisal there is a risk of the structures being under- or over-insured. Underinsuring a property places the association at risk financially should there be a catastrophic loss resulting in structures needing to be rebuilt. With insurance premiums at the highest level ever, being overinsured will result in an association paying unnecessary premiums. An appraisal also provides an unbiased third-party valuation that demonstrates due diligence on the part of property managers, board members and their insurance agents.

Choosing an insurance appraisal provider is a major decision on the part of the property manager and/or board. How does an association determine which provider is best for them? There are several questions that can be asked.

How stable is the provider? This can be determined by asking how long the company has been in business. Generally, a company that has been in operation for a number of years has proven itself in the marketplace.

How experienced are the appraisers? The appraisers should have a number of years experience in construction cost valuation and should be knowledgeable of construction cost data in your specific area.

Is the provider a large company or a oneman shop? Should your appraiser retire, become ill or leave the business, there should be a guarantee of continuity of service. In choosing a larger provider, there will always be someone to assist you. When it is time to update your appraisal, the cost is much lower by using the same company.

Will a sample report be provided? As a client, you have the right to see the type of report you will receive.

What method does the appraisal company use to determine the insurable values? The company should provide a thorough onsite inspection and utilize the construction plans for each improvement on the property in order to determine accurate estimated insurable values.

Bruce D. Riemann is Certified Construction Inspector #6206 and is the senior appraiser at GAB Robins North America Inc.
Dana Michael Sanders, CPCU, CIC, AAI, ARM, AMIM, ASLI, ARe, AIC, is president of Sanders Insurance Management Co. Inc. and is a Florida resident countersigning agent for Joseph Held Co. Inc.