'Insurable Value' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Insurable value represents the level of coverage which an insurance policy provides. This is the amount which they company will give to the insured when there is a damage causing event. They typically assign these values to policies such as home insurance. There is an important difference between the true market value and the insured value that is crucial because homes are involved. The value difference between these two numbers on a house can amount to tens (or even hundreds) of thousands of dollars in many cases.
Insurance companies employ a standard computer model nowadays to figure up this insured value amount. This helps to guarantee consistency and transparency from one customer to the next. Customers are able to ask for a second round opinion or even a full reassessment when they feel that the policy does not fairly and fully appreciate their asset’s true value. In order to come up with insurable value, the insurance company will look at improvements which are done to the property. This might be a variety of changes made to the land or building. Some of these would be expansions to the primary house, a new roof, permanent updates or renovations made inside the house, and any new outbuildings constructed on the property.
The insurance policy needs to deliver sufficient coverage in order for the home owner to be capable of rebuilding the home in a similar fashion on the land should devastating damage occur. This could be called replacement or rebuilding value as well. Insurable value will never include the land value or any appreciation of the property itself. This is because these are not property owner-driven improvements nor a part of the structure itself which is insured.
Consider a concrete example to clarify the topic. People could purchase a home for $400,000 in the U.S. The insurable value might only be $250,000, which is the value for property-made destructible improvements. Should the house catch fire and burn to the ground, the insurance company would be willing to deliver enough resources to rebuild the house and put in the important appliances. It would not be as nice a house as if they bought a like home in that area though. This is why occasional updates on the insured value are critical so as to show the effects of higher costs and inflation on prices for construction supplies and contractor services in a given region.
The insurance company will like attempt to utilize a fast calculation for the home replacement value when they create the policy in the first place. They will consider the information which the owner provides on the property. Some policies are far more complicated. In these cases, the insurance firm will decide to dispatch a home assessor. This person will visually inspect and consider the property itself to decide on the exact amount of insurable value.
In the cases of commercial properties, this is often critical. The reason for this is that manufacturing plants and equipment will commonly be an important component of destructible improvements. They would boost the total of the insurable value. Should a factory collapse because of a devastating earthquake, the covered firm will require sufficient resources to not only rebuild the factory itself, but also to buy new production equipment. The insured company has to know that the insurance policy will provide sufficient coverage.
There are scenarios where the insurable value is actually approximately the same as the true cash value or market value. This depends on the property or other asset in question. It is a fact that insurance companies will provide different treatment to varying assets from property such as jewelry, art, cars, and other insurable property. With cars for example, the policy holders will insist on being able to replace a totaled out car with a similar one according to year, make, and model in the event of a tragic accident.
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