Many times, you may hear that friends, family and acquaintances are dissatisfied with an insurance claim they’ve made. More than likely, they’re unhappy because they feel they have been underpaid for a loss.

There are two easy ways to avoid this problem: Make sure you have proper insurance limits in place, and make sure you have proper coverage in place.

Insurance agents often face a real challenge in making sure that clients carry adequate insurance amounts on insured property.


The key is helping customers understand the different types of valuation, and how and why they are employed. There are three types:

• Market value is the amount of money a seller would reasonably accept from a buyer.

This value is used when talking about real estate transactions or bank appraisal values for a loan transaction. It includes all buildings, land, and improvements.

• Property tax value is similar to market value, in that municipal tax assessing departments use sales data to help establish reasonable property tax values.

This value is used to help communities understand the value of the real estate inventory owned by its seasonal and year-round residents and set tax rates. Again, this value includes buildings, land and improvements.

• Replacement value is a calculated estimate of what it would cost to replace a building using the current cost of materials and labor.

This is the value that builders use, as well as insurance companies. If a loss occurs “today,” the property must be repaired or replaced using the cost of materials and labor “today.” This value includes only structures and some improvements.

There can be large differences in the amount of money involved in each of these three valuations.

An extreme example would be a 2-acre property on Rangeley Lake with a very small, seasonal camp and 250 feet of water frontage.

In this instance, the market value might be $350,000; the current property tax value might be $250,000, and the replacement value of the small camp might be $50,000. The insured amount would be the $50,000 replacement value.


In addition to valuation, it’s important for policyholders to understand what obligations they have under the policy they buy and how those obligations fit in with property requirements. Each policy obligates the insurance company and the customer to do certain things.

For example, carrying adequate insurance is one of them. If adequate insurance is not purchased, a coinsurance clause found in most policies will trigger.

In simple terms, if a customer has insurance that is adequate to cover only 50 percent of the building replacement value and a loss occurs, the company need pay only 50 percent of the loss amount.

Property owners need to pay attention to the limits of insurance they are buying. Many policies have an inflation feature that automatically increases the coverage each year. However, this is not a substitute for a thorough analysis and calculation of replacement value every four years or so.

Most insurance agents have access to online calculation software or insurance company staff for more complicated properties. When your agent talks to you about property coverage limits, you should listen! If you haven’t heard from your agent recently, call him or her.


Another often-missed coverage need is what is known as “ordinance or law coverage.” This coverage makes sure you are adequately covered, in case there is any disconnect between the terms of your insurance policy and legal building requirements.

This coverage is most applicable for older properties, but even newer properties can be affected if there are changes in local, state or federal building codes.

Here’s how that might come into play:

After a loss occurs, an insurance company depends on its adjustors to determine the amount of loss and whether or not a property is salvageable.

For example, an insurer may determine that a property is a total loss and must be completely replaced if 60 percent of it is damaged. However, the community may have an ordinance that says if a property is 50 percent damaged, it must come down.

So if the insurance company determines that a property is 50 percent damaged, the insurer will pay only for that damage and debris removal, as well as the repairs of only the damaged portion.

Though the local ordinance will require the entire property to be demolished and rebuilt, the insurance policy will not respond to this because its language excludes coverage for tearing down and cleaning up something that is not “damaged.”

Additionally, some structures have features that are grandfathered, but if repair or reconstruction occurs after a loss, these changes must meet current code.

An example might be an apartment or condominium building with no sprinkler system that must have a sprinkler system installed during repairs or rebuilding after a loss. Most policies will not properly respond to this additional cost because it is excluded or minimally provided.

The good news is that coverage is available for these situations. It usually can be added to an existing property policy, and it is quite affordable.

Just ask about “ordinance and law coverage” and make sure that you and the agent understand reconstruction and repair requirements in your community.

As with other aspects of your insurance, review this provision every four years or so, as well as when there are changes to local, state and federal laws that might affect building codes.


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