From The Iowa County magazine June 2022 issue

Property Valuations

In March of this year, it was reported that U.S. inflation had hit a 40-year high. This probably comes as no surprise to anyone, given it has been in the news for months, but it’s worth noting that the costs of food, gasoline, and automobiles have soared. Millions upon millions of people all over the country are feeling some level of “financial squeeze” as a result. And while many of us are now paying more attention to the costs of the items we regularly use and purchase, there is something we rely on daily that we may be overlooking.

I’m referring to insurance coverage, which is something we, as individuals, don’t often think about unless we need it. As county officials, you are likely already well aware the costs of doing business have increased dramatically. So, too, have the costs associated with providing coverage for such business.

If you’re an ICAP member, you already know our team has spent the last 18 months talking about explosive jury verdicts/settlement amounts and social inflation, the latter of which refers to rising litigation costs and incredible jumps in claim payment amounts. In recent weeks, we’ve started to communicate with ICAP members about other costs that are likely impacting your entity. Most notable is the increased cost to secure property coverage.

In the current climate, it’s essential the costs associated with your property coverage increase because your insurable values must increase. Your county will find itself grossly underinsured if they don’t. This is because – like food, gas and automobiles – building, labor, and raw material costs have skyrocketed. A building that was built for $300,000 five years ago is likely to be worth significantly more than that now. As a result, the costs associated with repairing or replacing that building will be dramatically increased should the property sustain a loss. This could leave the county on the hook for some of the cost of the loss.

Considering severe weather events caused a combined $145 billion in damages last year (according to data from the National Oceanic and Atmospheric Administration’s National Centers for Environmental Information), it’s likely many of us will, at some point, have property that sustains a loss. Thus, it is essential we value and cover such property appropriately. In this context, “appropriately” means property should be valued at a limit suitable to provide for repair or full replacement should it prove necessary. This is true for buildings, contents, and all miscellaneous property. 

Although covering property can be overwhelming, there are tools available through your local agent and coverage provider that can make the process less painful. Take an inflation guard, for example. This is a mechanism commonly used for property coverage, as it automatically increases building values on an annual basis, generally at a rate of roughly 3%. It goes without saying, given the current climate, such a rate simply isn’t enough, especially as often applies to buildings only.

In an attempt to help provide for member counties, ICAP is adding an 8% inflation guard to all entity-owned buildings (meaning building valuations will be adjusted accordingly). Counties must do more still, though, to keep up with current inflationary amount (currently estimated at 16%).

In addition to using an inflation guard, counties can take advantage of a data analysis tool to help ensure adequate limits are in place. This tool works by utilizing building data points (year built, construction code, fire protection class code and number of floors) to help the county calculate current construction values for purposes of listing at replacement cost. The process is typically very quick and easy to work through (carriers should already have the required data points on file), and it can have a significant impact on listed building values. If you’re an ICAP member, you can request this process be completed on your properties through ICAP Risk Control.

A blanket limit is another tool to help ensure adequate property coverage is in place. With ICAP, a blanket limit is determined by adding the coverage limits of all covered buildings and contents together. The sum - the blanket limit - is available to help compensate for individual building limits that may be inadequate. While a blanket limit can enable coverage for an unexpectedly underinsured/undervalued building, it should be acknowledged the blanket limit is the total amount a provider would pay on any single loss, regardless of the amount of damage incurred.

Items that move around and do not stay in one place (for example, tools and/or heavy machinery) won’t be listed as contents for a designated location; instead, they should be included on an “Additional Property” or “Inland Marine” policy. Note such properties are not subject to an inflation guard, despite the fact some equipment prices are up 19% over their costs in 2021. Thus, it is absolutely critical the values of such items (think heavy machinery, lawn mowers, road graders, etc.) are examined and adjusted annually.

Kasi Koehler, ICAP Marketing, talked about this at length earlier this year when she hosted a live webinar to discuss the various means of valuing property. In addition to providing a comprehensive overview of the various methods used to value property, Kasi discussed the real-world applications of each when it comes to an actual loss. Those applications are important to understand, especially given they can mean so much to your county’s bottom line.

Knowing exactly how a building or piece of equipment should be valued can be challenging, but you can lean on your local insurance agent to help. With an annual review, your agent can work with county representatives to review all listed property and ensure accurate limits (and adequate blanket coverage) are in place. These limits will not only ensure county-owned property is valued appropriately, they’ll also prove the single greatest factor in ensuring your county is adequately provided for in the event of an overall adjustment of loss.