Insurance to value, abbreviated as ITV, is an important concept in the world of property insurance. It applies equally to personal insurance and business insurance. Essentially, any insurance that is covering something tangibile like a home, renter contents, commercial building, business inventory or even business income, needs to have adequate insurance to value.
What is insurance to value?
Quite simply, insurance to value means that the amount of insurance purchased by the policyholder is adequate to either replace the property, or meet any policy conditions such as a co-insurance clause.
Insurance to value means that the policyholder has adequate coverage to rebuild a structure or replace business inventory in the event of a total loss. It means a homeowner has adequate insurance to replace his belongings and fully repair his home after a large claim. ITV means a renter has enough insurance to replace personal belongings should an apartment complex burn down.
It would seem to make sense that every policy holder would buy adquate insurance to cover their property. However, inadequate insurance to value is an enormous problem in the insurance industry. The most common reason that policyholders choose to under-insure property is price. It is true that catastrophic property claims are fairly infrequent. The odds of you suffering a complete loss to your business, home or business inventory are low. Many policyholders take the chance that they will never need to make a claim for the entire value of their property. In essence, they save a few dollars in premium by accepting inadequate insurance.
This is a serious mistake that may end up costing the policyholder far more than they realize. First, most commercial property insurance policies contain a co-insurance clause. Co-insurance allows the insurance company to provide only a partial settlement if the policyholder does not maintain adequate insurance to value. A common co-insurance clause is 80%, meaning the policyholder must purchase property insurance equal to 80% of the replacement cost. As an example, a business owner has a building with a $1,000,000 replacement cost. His policy has an 80% co-insurance requirement which means he must purchase at least $800,000 of coverage to be compliant. Instead, he buys $500,000 of insurance, assuming his building will never suffer a total loss. A few months later, his building is vandalized and requires $50,000 in repairs. The insurance company adjusts the claim as follows:
Coverage Purchased/Coverage Required X Amount of the Loss
$500,000/$800,000 x 50,000 = $31,250 payable to the insured
In this example, failing to purchase adequate insurance to value cost the insured $18,750 in a co-insurance penalty.
Second, most home insurance policies provide replacement cost coverage, but only if the insured agrees to cover the home for the entire replacement value. If the insured elects a lower limit of coverage the claim is settled on an actual cash value basis, meaning depreciated value.
Adequate insurance to value is important in ensuring you a fully indemnified in the event of a claim to your property. Take the time to read your insurance policies and understand what requirements they contain for insurance to value. If you have questions, contact Safeguard Insurance for a no-obligation policy review.