Campground Property Insurance
For most people, property insurance is a type of insurance that seems easy to understand. You pick a coverage limit for your building(s) and a limit for the contents of each building and you are protected if something happens to the building or its contents. Simple enough, right?
When selecting the limits for your building, one of the first priorities should be to determine the type of valuation. The two most common options for valuing a building are replacement cost or actual cash value.
Property Replacement cost
Replacement cost is commonly defined as the cost to have a qualified contractor rebuild your building with a similar sized structure of “like kind and quality”. In other words, if you have a 3000 square foot building with frame construction, you should assign a limit to reflect the cost of rebuilding another 3000 square foot, frame construction building. You would not use the cost to build a 2000 square foot or a 4000 square foot building. Similarly, you would not use the cost to build a brick or steel building.
Actual Cash Value of Property
Actual cash value is an insurance term and it is commonly misunderstood. Actual cash value is not the market value of the property. Actual cash value is not what you paid for the property nor is it the amount for which you would sell the property. Actual cash value is not the amount on your tax bill. Actual cash value is defined by an insurance policy as replacement cost of the property, minus depreciation. After a loss occurs, an insurance adjuster will calculate the replacement cost first, then factor the age of the building and the age of any updates/improvements to the building to determine the amount of depreciation to be subtracted. The net result is the actual cash value.
Some campground owners choose to insure their properties for actual cash value. The actual cash value is lower than the replacement cost therefore the premiums can be lower. But that decision can be shortsighted if they’re not aware of the how a property claim will be settled with a replacement cost valuation vs. actual cash value. This is most evident with claims that involve only a partial loss to property.
Example: Actual Cash Value Roofing and Shingle Replacement
A policyholder has a 40 year old building with a shingle roof. The roof was replaced 10 years ago with shingles rated for a 30 year life. A tornado or windstorm severely damages the roof and it has to be re-shingled. In this example, the building is insured using actual cash value. The adjuster will subtract one third (1/3) of the cost to replace the roof, because the 30 year roof had used up 10 years of its useful life (10 years divided by 30 years = 1/3). In other words, the roof has “depreciated” by a 1/3 of its original value. After the deductible, the insurance company would only pay 2/3 of the cost to re-shingle the roof because it was insured for actual cash value. If the building was insured for its replacement cost, after the deductible, the insurance company would pay 100% of the loss, to replace the shingles with like kind and quality. While there may have been some premium savings insuring the building at a lower limit (actual cash value), this policyholder would have had to pay 1/3 of the loss out of their own pocket because they decided to insure the building at its actual cash value.
Let’s put some numbers to this example. The cost to replace the roof is $12,000. The roof is determined to be 1/3 depreciated, therefore the insurance company will pay 2/3 of the value of a new roof (66% of replacement cost).
$12,000 X 66% = $8,000.
The building owner has to pay their deductible, along with the shortfall to cover the depreciated portion of the roof. ($4,000, or 1/3 of the cost to fix/replace the roof).
There is a second major problem related to insuring property for replacement cost or actual cash value, co-insurance. Co-insurance is a penalty clause found in virtually every property insurance policy. It contractually requires a property owner to insure property to its true value, whether it is replacement cost or actual cash value. In other words, regardless of which valuation method you choose, the limit on the policy should reflect the true replacement cost OR the true actual cash value, otherwise a penalty may be imposed. The co-insurance clause will penalize the property owner at the time of loss if they picked a limit of insurance that isn’t sufficient.
Example: Actual Cash Value Property Coverage
A building is insured using actual cash value. The building owner feels that the market value is about $150,000, so he does not want to insure the building for more than that amount. Remember, market value has no bearing on the actual cash value. A loss occurs, and an adjustor determines the actual cash value of the building to be $200,000. The building is only insured for $150,000. The loss caused damage to the roof, and the cost to replace the roof is $12,000. However, the roof is 1/3 depreciated based on its age. The adjustor will begin the claim process as follows:
$12,000 X (.66%) = $8,000
But wait! The building was not insured to its true actual cash value ($200,000), so a co-insurance penalty will apply. To calculate a co-insurance penalty, the insurance industry uses an equation expressed as the amount of coverage you “did carry”, divided by the amount of coverage you “should have carried”, multiplied by the amount of the loss. It will look like this:
Policyholder “did” have a limit of: $150,000
He “should have” insured a limit of: $200,000 to reflect the true actual cash value
150,000 / 200,000 = 3/4
The depreciated loss was $8,000. But, with the co-insurance penalty applied, the final settlement will be:
$8,000 X (3/4) = $6,000
The building owner only receives $6,000 of the $12,000 needed to replace the roof (less the deductible).
So, how should you insure your property?
Part of the solution to the problem is obvious. Choose replacement cost valuation whenever possible. However, whether you pick actual cash value or replacement cost, the limit must still meet the co-insurance requirements. You must still be insured to value. The best way to determine these values are to use your building appraisal to determine the proper building limit or you should get advice from a local contractor. And most importantly, work with an agent that will regularly discuss property limits with you and review your current valuations.