Small Business Actual Cash Value or Replacement Cost

Your small business property insurance policy contains provisions which specify how a first party property damage loss will be valued.  Generally the two manners of valuing the loss are replacement cost and actual cash value (ACV).  

Many small businesses especially start-ups and restaurants are choosing to locate their operations in nonstandard buildings including historic buildings, warehouses, renovated containers shipping boxes, or other brand new constructions.  Where you choose to location can affect whether replacement cost or actual cash value is the best manner of valuing.

The default manner of valuing a commercial building is to value it at replacement cost.  If your small business is located in a normal office building and you are using a standard insurance carrier, the carrier is more likely than not going to offer you this coverage. Replacement cost valuation will identify the cost to replace the building as it was at the time of loss.  So whether the materials or labor costs have increased or decreased since your purchase of the building, it does not matter, the policy will cover those costs.

By contrast ACV looks at either the market value of the property or the replacement cost minus depreciation.  You should verify the interpretation based upon your state law and your policy language.  When you choose ACV you are going to pay less for your property coverage.  However, if you need to file a claim on the building and the coverage is less than what is needed all of the savings would be loss.  So your choice of ACV should not be price based but rather based on an analysis of your commercial property.

Professional offices and retail stores have generic commercial buildings so an ACV which is based upon the market value of the property may be sufficient for them because they can easily replace their properties within the marketplace.  ACV, when it takes into account depreciation, is great for new constructions or buildings whose depreciation has plateaued.  This could include historic buildings depending on the location, age, and condition of the building.  A new construction is less affected by depreciation so the valuation with ACV and replacement cost for a new construction may be similar.  Also, historic buildings can’t be replaced so ACV may be a cost saving alternative.  ACV is also used for low valued easily replaceable property like barns, sheds, warehouses.

Your small business insurance advisor will want to consult Marshall & Swift for an in depth valuation of your property in order to make the final determination and will need to know information such as the construction type, age, square foot, dates of any renovations, roof type and other specific property information in order to properly advise you.