ACV Vs. Functional Replacement???

[VaDwayne]

I need some advice from an EXPERIENCED commercial agent. I am working on insuring a B&B. The INN itself is very old, built in the early 1800's and has a value of $1.3 million dollars. Their current policy is on a "functional replacement cost" basis and the quote that I have in hand is on an "ACV" basis.

Given that the INN is that old would you recommend the functional over ACV, or visa versa?

 

[djs]

Never sell an old but functional building an ACV policy. It isn't worth the premium, in my opinion.

Functional replacement will get you rebuilt, an ACV policy won't. It really is that simple.

Lets look at these.... (for those who don't know the terms)....

ACV - Actual cash value, basically the depreciated value of the asset. How much is the ACV of a building built in the 1800's? Truthfully, not much. Replacement cost is MUCH higher.

Functional Replacement - Pretty typical for older buildings. Its based on the old saying 'They don't build them like they used to'. What does this really mean? The plaster walls will be rebuilt with drywall rather than plaster. The knob and tube wiring will be replaced with current standards. Some of the 'ornateness' won't be redone. You'll get rebuilt with 2x4's, not whatever is in the walls currently. Basically, you get rebuilt with the functionality of the house, just not the same build style.

Face it, its VERY hard to get someone to come in and actually plaster your walls nowadays. It's also very expensive. Drywall is much cheaper. Functional replacement will get you the drywall, an ACV policy may not.

Dan

 

[VaDwayne]

Never sell an old but functional building an ACV policy. It isn't worth the premium, in my opinion.

Functional replacement will get you rebuilt, an ACV policy won't. It really is that simple.

Lets look at these.... (for those who don't know the terms)....

ACV - Actual cash value, basically the depreciated value of the asset. How much is the ACV of a building built in the 1800's? Truthfully, not much. Replacement cost is MUCH higher.

Functional Replacement - Pretty typical for older buildings. Its based on the old saying 'They don't build them like they used to'. What does this really mean? The plaster walls will be rebuilt with drywall rather than plaster. The knob and tube wiring will be replaced with current standards. Some of the 'ornateness' won't be redone. You'll get rebuilt with 2x4's, not whatever is in the walls currently. Basically, you get rebuilt with the functionality of the house, just not the same build style.

Face it, its VERY hard to get someone to come in and actually plaster your walls nowadays. It's also very expensive. Drywall is much cheaper. Functional replacement will get you the drywall, an ACV policy may not.

Dan

This is my opinion too, just wasn't 100% sure I was thinking correctly. I want them to have the best coverage and if that means they stay where they are, then so be it. Our premiums are $40.00 different for $1.3 mill FRC vs. $1.3 mill ACV.

How in the world would an agent even know what the ACV is on a building that old. My cost estimator will allow me to depreciate a property but this building is 200 years old. It is a beautiful place and in great condition.

Any other opinions out there in forum land?

 

[Guest]

exactly what DJS says......

actually, also, I would be fairly surprised an U/W would let you write this at ACV.......

and also, I would think this is leaving yourself open for an E&O.......especially at only $40 difference

 

[djs]

This is my opinion too, just wasn't 100% sure I was thinking correctly. I want them to have the best coverage and if that means they stay where they are, then so be it. Our premiums are $40.00 different for $1.3 mill FRC vs. $1.3 mill ACV.

How in the world would an agent even know what the ACV is on a building that old. My cost estimator will allow me to depreciate a property but this building is 200 years old. It is a beautiful place and in great condition.

Any other opinions out there in forum land?

The original building itself is probably pretty much fully depreciated, meaning the ACV would be debris removal costs plus the depreciated value of any upgrades/updates done since original construction.

You can get a policy that would replace it with similar stuff (can't do an exact replacement) but that would be expensive.

This is one where you have to do whats right for the client. An ACV policy doesn't work on older homes or buildings very well.

Dan

 

[VaDwayne]

exactly what DJS says......

actually, also, I would be fairly surprised an U/W would let you write this at ACV.......

and also, I would think this is leaving yourself open for an E&O.......especially at only $40 difference

My quote came back from Philadelphia at ACV..
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The original building itself is probably pretty much fully depreciated, meaning the ACV would be debris removal costs plus the depreciated value of any upgrades/updates done since original construction.

You can get a policy that would replace it with similar stuff (can't do an exact replacement) but that would be expensive.

This is one where you have to do whats right for the client. An ACV policy doesn't work on older homes or buildings very well.

Dan

I agree 100%.. I have asked Phil. if we can write it at FRC but haven't heard back from them. This guy is in my BNI group, I already write is contracting business, so if I can't get the ACV changed I am going to back off of this one.

 

[Air Jer]

Dwayne, one of the best uses of FRC is it allow the agent, the insured and the company to agree to a lower value in advance. I am of the opinion that the ACV basis and FRC basis rarely will have the same value.

Some underwriters will let you choose a value and go along with it but the good ones will want to see how that FRC was derived and this can be a difficult chore. As agents, this is beyond our scope and the way of determing this value falls on the insured. If I rebuild my inn, I may not want 20,000 sq ft but feel more than adequate with 7,500 sq ft. I may even be comfortable with frame construction as opposed to JM. The difficult thing is the insured having a clear picture of what they would want if they had to rebuild and to have a contractor give them the estimate of what the new structure would cost.

However, if these further steps can be done, instead of a $1,000,000 ACV structure they may find that they can get by with a $750,000 structure, thus a lower premium charge. By doing this on a FRC basis as opposed to ACV brings about less of a concern of a coinsurance penalty being used as well. It would be interesting to know if your prospect has taken these steps in the past. Generally a form is required to be signed by the insured that the underwriters put into their underwriting files as their CYA.

I'm surprised Erie won't do this for you, though I hear through the grapevine that they are dramatically increasing their rates but that might just be my state.

 

[VaDwayne]

Dwayne, one of the best uses of FRC is it allow the agent, the insured and the company to agree to a lower value in advance. I am of the opinion that the ACV basis and FRC basis rarely will have the same value.

Some underwriters will let you choose a value and go along with it but the good ones will want to see how that FRC was derived and this can be a difficult chore. As agents, this is beyond our scope and the way of determing this value falls on the insured. If I rebuild my inn, I may not want 20,000 sq ft but feel more than adequate with 7,500 sq ft. I may even be comfortable with frame construction as opposed to JM. The difficult thing is the insured having a clear picture of what they would want if they had to rebuild and to have a contractor give them the estimate of what the new structure would cost.

However, if these further steps can be done, instead of a $1,000,000 ACV structure they may find that they can get by with a $750,000 structure, thus a lower premium charge. By doing this on a FRC basis as opposed to ACV brings about less of a concern of a coinsurance penalty being used as well. It would be interesting to know if your prospect has taken these steps in the past. Generally a form is required to be signed by the insured that the underwriters put into their underwriting files as their CYA.

I'm surprised Erie won't do this for you, though I hear through the grapevine that they are dramatically increasing their rates but that might just be my state.

Erie won't touch the Inn as it is in a fire class 10 area, the age of the building, and the age of the updates.

It's Philadelphia that came back at ACV. They said they would write it at FRC but it would be quite a bit more expensive. His current carrier is wrint it at FRC for almost the same premium as the ACV premium form Phil.

 

[NCAgent]

Erie won't touch the Inn as it is in a fire class 10 area, the age of the building, and the age of the updates.

It's Philadelphia that came back at ACV. They said they would write it at FRC but it would be quite a bit more expensive. His current carrier is wrint it at FRC for almost the same premium as the ACV premium form Phil.

Nice, what carrier does he have now? Just do a BOR letter for it?

I've encountered times where a policy was written and then the fire code was redone in the past. It makes it harder to get someone when quoted with rates at a PC6 and then go to a 9 or 10. Was this the case here?

 

[VaDwayne]

Nice, what carrier does he have now? Just do a BOR letter for it?

I've encountered times where a policy was written and then the fire code was redone in the past. It makes it harder to get someone when quoted with rates at a PC6 and then go to a 9 or 10. Was this the case here?

He is with Auto Owners...