Nobody can predict the future. Whether it be a fire, flooding, theft, or any other unfortunate mishap, there is always a possibility of unexpected loss in your business assets.
That is where business insurance comes in. And while business insurance is totally necessary, it cannot work well for you if you do not give the insurer an accurate statement of values. What is a statement of values?
In this article, we will explore what a statement of values is and how to prepare one for your insurance policy.
Statement of Values (SOV) Definition
So, what is a statement of values? A statement of values or SOV is a report the insured submits to an insurer that helps determine the insurance premium. The SOV tells just how much a property is worth so the underwriter knows how the premium should be calculated.
Since various types of property (tenant improvements, inventory, equipment, etc) can be listed on the document, the underwriter will have different ratings based on the various categories. The SOV should include information on:
- What property it is (including address and/or GPS coordinates)
- What type of property it is, such as a building, equipment, or stock
- The property’s value
- The method to calculate the property’s value
- The square footage
- The number of stories
- The year built
- The building description
- COPE and Secondary COPE data
- ISO Construction Class
- All other insurable items on the property, including machinery and other equipment
If you are insuring more than one property, you will need to do one SOV for each location. It is important that the information you give is accurate and fully details the value of your property. If you don’t fully disclose everything of value, you will be underinsured.
STATEMENT OF VALUES USES
Determining the insurance premium is not the only use for the SOV. Other uses for the statement of values include:
- Tax reporting: Knowing the values of your properties will allow for simple and quick preparation of your tax documents
- Risk management: Clients get more into their assets when preparing an SOV, which can help them address any issues that put the property at risk of possible loss. This allows clients strategic planning of asset management, which leads to better business decisions and possibly saves more money long-term
- Ensure the limits are adequate: Brokers can examine the statement to ensure the client is protected adequately by the policy
- Homeowners’ insurance policy: Sometimes SOVs are required for high-value items on a homeowners’ insurance policy. Examples of high-value items included in the statement would be art, jewelry, watches, or other valuable belongings
- Helpful for special terms: Clients may request special terms where an SOV is required by the underwriter. One example would be a coinsurance clause, a provision that states you are required to carry insurance coverage worth a certain percentage of your property’s value
Methods Used to Calculate Property Value
There are many ways to calculate a property’s value. But which is right for you and your property? It depends on the property insured and your needs. In some cases, it may be a good idea to choose an alternative valuation method to insure your property at a lower premium.
Here are some of the most common valuation methods.
- Actual Cash Value: This valuation method considers repair and replacement costs in its assessment. It will also account for the depreciation of the original property. Therefore the value is calculated as replacement cost – depreciation. This allows the client to insure their property for less, but to receive less on their claim. This method is recommended if the business doesn’t need the building rebuilt as-is.
- Replacement Cost: This method covers the cost to repair or replace materials that are of equal or similar quality. The land’s value is not included, and the amount is simply determined by how much would be needed to hire workers and purchase materials in the event the property needs to be repaired or replaced. Depreciation is not taken into account, which means it offers high financial protection.
- Functional Replacement Cost: Less utilized is the functional replacement cost method, which allows some flexibility and savings of cost. It is used when a similar building can be built at a lower price than the original. This means the property would be replaced with less expensive materials that are functionally equivalent. Depreciation is again not taken into account. This method is a good option for those properties that have expensive materials that aren’t necessary for their function.
Preparing the Document
Once you are ready to insure your property, you will need to prepare your SOV. Mistakes on your SOV list of values could mean being underinsured, leaving your property vulnerable to risk. Your insurer will likely have some spreadsheets and forms to help guide the process.
To ensure the information is accurate and fully comprehensive, get some help from a financial professional. Work with your broker, underwriter, appraisal partner, or insurance provider to not only review your information but to figure out strategies to get the best coverage possible at a rate that works for you.
Here are a couple of other tools to help you to prepare your statement of values:
- Google Earth Pro: When verifying your SOV or performing an audit, you will come across information that is no longer accurate. To verify this information, you can use Google Earth Pro. With this program, you can find things like GPS coordinates, property images, distances, sizes, and more. Google Earth Pro is free for users. Just download it and complete your SOV in a snap!
- SnagIt: To capture images or other information for your SOV, it can be helpful to use a screen capture tool. After capturing a screenshot or a video, simply add any additional context, then share it as an image, video, or GIF. This can be a particularly helpful feature if you need to quickly share information with visuals. However, this is a paid feature.
The document itself is typically an Excel spreadsheet with a long list or even a web-based software program. Once you’ve completed the SOV, check over it for the following:
It is not possible to disclose too much data about the property. Having any gaps in data on the SOV will be a bad sign to the underwriter. Therefore, be sure to look over the information to make sure you didn’t miss anything.
Check and double-check the data. Ensure that all the information is correct and up-to-date. Be precise in what you disclose instead of using rounded-up amounts, vague descriptions, or wrong addresses. Additionally, if there is more than one building on the property, create entries for each building.
Lumping all the buildings into one property can cause confusion and issues with your policy. For instance, if the property is a school, be sure to complete an entry for each building. For example, the gym, each building of classrooms, and the football arena will each have its entry. You will want each structure covered in case there is a loss.
To check for inaccuracies, here are a few questions to ask yourself:
- Did your values come from a recently dated valuation or the property’s original cost with an inflationary index applied each year?
- If you have used an inflationary index, how did you come up with the index and how long have you been indexing?
- Have you tabulated any changes to property, machinery, or equipment such as improvements or depreciation?
- Have you accounted for freight charges, installation costs, or any other considerations in the replacement of your property?
Not knowing the answers to these questions could put you at risk of submitting inaccurate information, and could put your property at risk in case of a disaster.
The information you provide should not only be accurate, but it should also be consistent. Sometimes when many people are working within one spreadsheet, it can cause some inconsistencies in the information. That is why it could be helpful to utilize a web-based software tool.
These tools can be accessed by all employees, including a history of the audits done, and the approvals given. Using an organized system can help with any inconsistencies that can occur in property schedules. Once your SOV report is done and has been reviewed a few times, the total number you’ve come up with is referred to as Total Insurable Value (TIV).
Next, it is then time to submit it to your underwriter. He or she will come up with a premium based on the information. After you’ve signed the documents agreeing to the stated premium, your policy will be activated. Over time, you will want to come back and review your SOV to make sure you aren’t underinsured in case things have changed.
Constantly reassess the values of your assets. If these values change, this means your property is no longer covered with an adequate premium. Therefore, it might be a good idea to get an insurance replacement appraisal from a certified third party to submit to your insurer.
There are also government agencies and risk pools that partner with third-party appraisers to do on-site inspections to verify their data. This can be an extra resource when you want to obtain accurate, up-to-date information about your property. If you’ve found a blind spot in your coverage, the update to your SOV can change your premium. However, your property will no doubt be covered in the event of a claim since there are no longer gaps in coverage.
Pitfalls to Be Aware Of
If it all goes according to plan, you should be accurately insured. However, there are several risks when it comes to insurance premiums:
- Being overinsured: Some people may pay more for their premium than necessary. In this case, and if a loss is incurred, they may not receive the excess insurance money they’ve paid for. That means that money they’ve spent could be lost. Don’t fall into the trap of assuming the more you pay, the more you’ll get back in the event of a loss!
- Being underinsured: If you are paying less than your property’s value necessitates, you could face a coinsurance penalty. These penalties happen as a result of a coinsurance clause, which we mentioned earlier. The coinsurance clause helps spread the risk if the insured is underpaying on their premium. This means they must pay more in the event of a claim.
Typically those clients that choose the coinsurance clause will have a coinsurance limit of 90%, which is the most common limit. This means that they must insure at least 90% of their property value’s replacement cost. Let’s look at an example.
If a client goes with an insurable limit of $750,000 on a $1,000,000 property, they are choosing to insure less than the coinsurance clause limit (90%). The policy they choose has a deductible of $1,000. The building was damaged in a hurricane, totaling $250,000 in damages.
And since the client did not meet the minimum of 90% insurable limit, they will be faced with the coinsurance penalty. To find out how much the penalty is, you must apply the following equation:
Amount insured/the amount should have insured X the amount of loss = amount insurance policy will pay
In this example, the equation will go as follows:
$750,000 (insured) / $900,000 (should have insured) X $250,000 (loss) = $208,333 will be paid by insurance company
If the client had insured $900,000 or more, he or she would only have had to pay the $1,000 deductible. However, in this scenario, the client had to pay $41,667 ($250,000 – $208,333=$41,667). This scenario is a good reason why it is best to insure the minimum limit stipulated in the coinsurance clause.
Along with submitting accurate information in your SOV, you can avoid overpaying, underpaying, and instead receive the most ideal coverage you need.
Here at Coastal Kapital, We Value You
We hope we answered the question, “What is a statement of values?” If you’d like more information on your property insurance policy, contact us. We’d be happy to help.If You Like Please Share It: