Insurance Replacement Valuation – An Emerging Appraisal Discipline

2. Insurance Replacement Valuation – An Emerging Appraisal Discipline Presented by: Patricia Staebler, SRA Larry Golicz, Ph.D., MAI Joseph Magdziarz, MAI, SRA Sara Schwarzentraub, SRA

3. Definition of insurance replacement value The cost of replacement of all improvements to a property which could conceivably be destroyed. www.myrealestatedictionary.com

4. Definition of insurance replacement value, cont. Replacement cost of a building for which standard insurance policies provide indemnity cover. Insurable value is less than the property’s appraised market value, because it excludes the value of land on which the building stands. The formula for computing the insurable value is usually stated in the valuation clause of a policy document. http://www.businessdictionary.com

5. Replacement cost is the actual cost to replace an item or structure at its pre-loss condition. Conclusion: Replacement Value = Insurable Value

6. Therefore the scope of work is to appraise the improvements “as-is” without the underlying land value. However, with one important distinction: • Flood Value – includes foundation • Casualty Value (Wind, Fire) – excludes foundation and about 15% of plumbing and electric

7. The 3 D’s Most often appraisers take on the task to deduct or add additional items, which are not part of the scope of work. For example the three D’s: Demolition Debris Removal Depreciation

8. Debris removal and demolition are automatically built into the insurance policy • Depreciation should never be deducted from the RCV as the scope of work clearly states to appraise the “value as-is”. - The application of depreciation is an insurance internal decision applied by the insurance carrier in a payout scenario (ACV vs. RCV).

9. Cost approach vs. RCV • Conventional cost approach deducts deprecation and includes the site • An insurance appraisal requests the reconstruction value of the improvements as-is with like-kind material, no consideration of depreciation and the exclusion of the underlying land value.

10. New construction vs. Reconstruction • The difference between new construction and reconstruction is approximately 15% as an industry standard • It is common knowledge that rehabbing will always be more cost intense than building from scratch • The same is true for reconstruction of partially destroyed building.

11. Reconstruction vs. Construction up to code • Replacement of the structure with like-kind material at today’s cost” • “Up to code”is the replacement of the structure under consideration of current building codes

12. USPAP compliance Many appraisers have the opinion that an appraisal without the necessity of the highest and best use is not an appraisal and therefore do not consider replacement valuation as an appraisal discipline per se.

13. Goal: One of the main reasons for this workshop is to start a meaningful discussion to reach consensus in regard to USPAP compliance of insurance appraisals to protect the integrity of our profession and to protect the public from unlicensed and uneducated providers alike.

14. Supported Lack of HBU Because we do not derive a market value in insurance valuation we do not need to develop the highest and best use. The lack of the highest and best use is supported and there is no reason that an insurance appraisal should not be USPAP compliant in all other aspects. If we are acting as an appraiser, we are subject to appraisal standards and ethics.

15. Cost vs. value The point most often overseen is the emphasis on valuation. We do not provide a cost estimate per se, if we did, we would be cost estimators or contractors. We are appraisers and provide a valuation.

16. Cost vs. value Like in market value appraisals there are three possible approaches to estimate the reconstruction value of a building: • Software based estimate (Marshall & Swift/Boeckh) • Construction comparables • Builder’s and developers data

17. Cost vs. value • Reconciling all three sources will provide the appraiser with a reliable valuation • Even if the appraiser can only use the software as basis for the valuation, it is still not entirely a pure cost estimation, because there are too many variables the analyst has to input into the software to derive a valuation

18. Construction knowledge is essential • Basic construction knowledge • Building codes • ISO classification • Zoning • Flood zones • Coastal Construction Control Line • 50% FEMA rule

19. Construction knowledge is essential • Construction cost • Constant contact with builders • Site visits of current construction • Search for cost comparables • Marshall and Swift, R. S. Means

20. When discussing construction cost with developers, several items have to be considered: • What builders include in their cost per SF • Economy of scale • Overhead and Profit • Cost for new construction vs. reconstruction

21. Insurance Law Knowledge • Condominium insurance law • Citizens requirements • Definition of gross building area • Insurable building components • Uninsurable building components or site improvements • Lump sums • Line items (site improvements)

22. State Law Florida Statutes 718 regulates condominium associations and the following paragraph speaks about insurance appraisals: • (a) Adequate property insurance, regardless of any requirement in the declaration of condominium for coverage by the association for full insurable value, replacement cost, or similar coverage, must be based on the replacement cost of the property to be insured as determined by an independent insurance appraisal or update of a prior appraisal. The replacement cost must be determined at least once every 36 months.

23. State Law cont. • Although state law requires an appraisal, which should be completed by an appraiser, the Florida Department of Business and Professional Regulation does not regulate insurance appraisals, due to the same reasons we mentioned before, lack of HBU and cost vs. value. • We would like to hear, how your home state regulates insurance appraisal work and we would appreciate if you could email this information to patricia@staeblerappraisal.com.

24. Thank you for your attention ! We will now open the floor for discussion on this topic.