What is building insurance?
Building insurance covers owners of physical structures, including office buildings, retail buildings, and residential properties for lease, from damage and destruction due to fire, flood, earthquake, and other forms of natural and man-made disasters. As the specific policy options vary with each specific situation, you should pay careful attention to the policy particulars as you begin the building insurance comparison process.
Two types of building insurance coverage
There are two main categories of building insurance policy options.
- Replacement value building insurance. In this policy option, you are insured for the amount of money the insurance company estimates to be the replacement cost of your building or other property. This option accounts for the cost of demolishing and removing the wreckage from your property after a disaster, then constructing a similar structure from the ground up.
- Cash value building insurance. A cash value policy pays you the approximate market value your structure would have been appraised at in the current market.
Which of these options is best for you? It depends on a number of factors. While cash value may be a bit cheaper coverage in some circumstances, it may not provide sufficient funds to replace your structure in the event of a catastrophe. Likewise, if you’re insured for replacement cost in a market with a high cash value compared to construction costs, you might be leaving money on the table.
Unfortunately, it’s impossible to predict how the real estate and construction markets will move in relation to each other in any given year, so it’s best to assess the long-term trends in your particular market. Understand that construction costs and real estate cash valuations go hand-in-hand. When the market is up, construction companies can charge more, and vice versa.
A simple building insurance approach
If you don’t want to continuously assess the real estate and construction markets in your area, and you don’t want the hassle of adjusting your policy type to reflect current conditions, a reasonable and conservative approach is to choose replacement value building insurance. This will help insure that your building can be restored to its full operating condition (or replaced entirely) after a disaster.
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