Insurable value is the amount of coverage extended under an insurance policy to replace or repair assets in the event of damage. This typically comes up with home insurance, where the distinction between the insurable and market value can be particularly important. Firms use a standardized method to compute this amount to ensure consistency between customers. Clients can request a reassessment or second opinion if they feel a policy does not accurately reflect the value of an asset.
To calculate insurable value, a firm considers the value of improvements made to a property. This can include residences along with outbuildings, and any permanent updates made, like new roofs or expansions. The policy should provide enough coverage to rebuild a similar home on the property in the event of catastrophic damage. Valuation does not include the value of the land or property appreciation, because these are not considered improvements made by the property owner.
For example, someone who buys a home for $350,000 United States Dollars (USD) might only have an insurable value of $200,000 USD, based on the value of the destructible improvements made to the property. If the home burns down, the insurance company can provide enough money to rebuild it and replace key appliances, but perhaps not to buy a similar home in the same area. Periodic updates to the insurable value may be necessary to reflect inflation and rising costs for contracting services and construction supplies.
A quick calculation may be used when the policy is originated, based on information about the property provided by the owner. For complex policies, the insurance company may send out an assessor to evaluate the real estate and determine the insurable value. This can be particularly important for commercial properties, where fixtures like manufacturing equipment are part of the destructible improvements, and increase the insurable value. If a factory collapses in an earthquake, the company needs to replace the equipment in addition to rebuilding, and must make sure it has enough coverage under the insurance policy.
In some cases, the insurable value may be the same as the market value or the actual cash value, depending on the nature of an asset. Insurance companies treat assets like cars, homes, and jewelry differently. With a car, for instance, people often insure for the market value, because they want to be able to replace their cars with one of like kind after an accident.