Condo Media - February 2025 - 19

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Valuation Methods
The insurance section of the condominium
documents charges the trustees
with the responsibility of insuring the
buildings in most cases to 100% of their
value. In fulfi lling this responsibility,
the trustees, guided by their property
management professional, need to
understand the valuation method that
will be applied and determine the full
replacement value of the building.
Let's break this down to discuss
the various valuation methods and
then focus on how to determine an
accurate building limit - especially
since the requirement for replacement
cost valuation is also fundamental to
every lending institution, as all Fannie
Mae-backed loans must include, at a
minimum, replacement cost valuation.
●Replacement Cost
First and foremost, the association's
declaration of trust's insurance section
outlines the requirements by which the
insurance placement should comply.
Among other requirements, the
insurance section requires the inclusion
of a " replacement cost " endorsement as
the valuation method. This is important
to know as the standard valuation
clause for a property policy is actual
cash value (ACV).
Most " replacement cost " provisions
can be found in the part of the property
policy under " valuation " or " loss settlement. "
The term " replacement cost "
means to repair the damaged property
with like-kind and quality materials
to restore the property to its pre-loss
condition, without deduction for depreciation,
deterioration, or obsolescence.
When claims are adjusted, the statement
of loss will show the replacement
cost value and the actual cash value of
the claim settlement. Property claims
are paid on an " actual cash value " basis
(replacement cost with a deduction
for depreciation, deterioration, and
obsolescence). The importance of
determining actual cash value is that an
insured is entitled to be paid the actual
cash value of the property until the
insured replaces or repairs the damaged
property, at which time the balance is
then paid.
When the valuation method is " replacement
cost, " the insured will never
be paid more than the building limit on
the policy. The replacement cost is predicated
on like-kind and quality of materials,
and the property to be replaced must
be used for the same general purpose as
that of the damaged property.
To receive the " depreciation holdback "
(delta between replacement cost
and actual cash value), many valuation
and loss settlement provisions require
the policy holder to replace or repair
the damaged property within 180 days
of the casualty. In today's regulatory
and construction environment, the
180-day limit is almost impossible to
achieve. The 180-day limit has been
challenged in the courts, and the " make
claim within 180 days " language has
been interpreted to require the insured
to notify the insurer of the intention to
repair or rebuild. Last year, one of my
clients applied for and was paid the depreciation
holdback 990 days after the
casualty, primarily because of the constant
communication by and between
the insured and the insurer's adjuster,
expressing the intent to complete the
repairs. During a claim, this kind of
communication is a key tool to achieving
a benefi cial claim settlement.
● Guaranteed or
Extended Replacement Cost
In addition to off ering replacement cost
valuation, insurers who specialize in the
condominium segment have the ability
to off er either guaranteed replacement
cost valuation (GRC), which essentially
has no cap on the limit to repair or replace
covered property from a covered
cause of loss with like-kind and quality,
or extended replacement cost valuation
(ERC), which provides up to 125% of
the building value in the event of a total
loss. The benefi t of GRC and ERC is
to provide additional resources in the
event of a regional catastrophe. When
possible, particularly for associations
with a single structure, trustees should
endeavor to secure GRC or ERC valuation
to further protect the association's
single largest asset: their building.
●Actual Cash Value
With the condominium concept of
housing approaching its 70th year,
many insurers have begun to express
concern over the aging building systems
by placing actual cash value clauses on
certain building envelope components,
such as roofs, windows, and sidings. The
implication is, after a casualty loss, the
ACV claim payment will be based on
the age of the roof, window, or siding,
which in some cases could result in a
reduced claim settlement. Insurers are
also taking this step as they do not want
to essentially become a substitute for
the replacement reserve fund. Both
trustees and managers must understand
the implications of having aging
building components and the weight of
the assignment of an ACV clause.
February 2025 CONDOMEDIA 19
Condo Media - February 2025

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