Getting insurance-to-value right in 2025

By Brian Johnston and Anthony Venette

When it comes to commercial real estate, nothing has been constant or predictable since the pandemic. The costs of materials, labor and code-driven rebuilding have been uneven since 2020. But many insureds still apply carry-forward trend factors to last year's numbers.

In today's property market, taking valuation shortcuts puts you at risk of underinsurance, coinsurance penalties and contentious claims. But having an independent appraisal of your property gives you a more disciplined approach that aligns your schedules with actual reconstruction costs and asset mix. Brokers can take the lead by helping clients scope, commission and maintain defensible values that the market will underwrite.

Rolled-forward values are easy to place until a loss exposes the gap. That’s where an independent property appraisal comes in. Here are three of the most important advantages of having an independent property appraisal:

1. Clear definition of value. Commercial property programs typically insure on replacement cost or actual cash value, and unique facilities may require reproduction cost.
2. Asset-level accuracy. Buildings, site improvements and movable equipment do not inflate at the same rate. An appraisal classifies assets, captures additions and disposals, and corrects legacy errors in fixed-asset reporting.
3. Schedule credibility. Appraisals provide the granularity that underwriters need for rating and catastrophe modeling.

A broker-led process that works

Establishing accurate property values requires a structured approach that balances rigorous methodology with practical maintenance. Here are five key steps to build and sustain defensible insurance schedules:

1. Confirm policy intent and valuation basis. Align with replacement cost, actual cash value or reproduction cost based on the asset type and policy language. Where code upgrades are likely, address ordinance or law coverage explicitly. Address specific catastrophe modeling data elements that an underwriter feels are important.
2. Commission an appraisal that takes the specific industry and region into consideration. The most durable engagements combine physical inventory of buildings and major equipment with methods tied to recognized cost sources and current indices. Deliverables should include location-level schedules.
3. Capture code, debris and soft-cost realities. Debris removal, professional fees and ordinance or law upgrades can materially increase rebuilding budgets and are not always captured by simple trending.
4. Tie annual updates to credible benchmarks. After a full appraisal, apply annual updates using reputable sources that fit the asset mix rather than a single house factor. Consider engaging an appraisal specialist for updates and reappraisals.
5. Refresh on a cadence, not in a crisis. For diversified portfolios, a three-year full refresh with annual indexation is a practical rhythm, accelerated after major capital projects or market shocks. Ongoing industry coverage underscores the benefits of defensible schedules at placement and claim time.

Underinsurance is not theoretical

Coinsurance clauses and sub-limits can erode recoveries even on partial losses when reported values lag the true replacement cost. Survey and market commentary point to persistent valuation gaps.

What ‘good’ looks like in the work product

Here are important considerations for addressing risk mitigation:

• Scope letter that mirrors the policy. Reference the valuation basis used in the policy and specify inclusions such as foundations, site improvements, and specialized equipment.

• Location-level schedules with roll-ups. Carriers need a clean link from asset detail to total insurable value and premium calculation.

• Assumptions tied to named sources. Cite recognized cost services and current PPI or industry indexes for trend factors and disclose regional adjustments and lead-time allowances.

• Reconciliation to the fixed-asset register. A tie-out that flags ghost assets and misclassifications improve both insurance and financial reporting hygiene.
• Executive summary for underwriters. A two-page overview stating methods, data sources, and sensitivity to key drivers makes placement discussions more efficient.

 How to position updated appraisals with clients

Here are three important considerations:

• Better market access. Underwriters price uncertainty. A defensible schedule can expand capacity options and reduce friction on limits, deductibles and sublimits.
• Claim-time leverage. When everyone agrees upfront on definitions and scope, disputes over actual cash value versus replacement cost new or ordinance and law are less likely to stall recovery.
• Operational benefits. Cleaning the fixed-asset register supports budgeting, maintenance planning and capital allocation.

A note on cost trend storytelling

Clients will likely ask you if costs are still rising. The honest answer is nuanced. Some inputs cooled from the spikes of 2021 and 2022, but aggregate materials and construction inputs remain above pre-pandemic levels and have resumed modest year-over-year increases. This is exactly why single-factor trending is risky. Use an appraisal to reset the base, then apply targeted, source-based updates each year.

Real world example

Scenario: Brewery with outdated valuation.

Business: Brew pub opened in 2019. Building appraised for $2 million, and ownership purchased a commercial property policy.

Policy details

• Building coverage: $2 million.
• Coinsurance clause: Requires coverage of at least 90% of the replacement cost.

Building valuation updates: Since the 2019 valuation and policy creation, the insured and their broker have used a 2.5% to 4% inflationary factor to update the property’s replacement cost. By 2025 the building’s valuation had increased 15% to $2.3 million based on these calculations. Due to rising cost of construction and upgrades made to the property, the actual increase in replacement cost -- which an appraisal would have identified – was 60%. Thus, the building should be appraised at $3.2 million, not at the original $2.3 million. That means the building is underinsured by $900,000, or 28%.

 Coinsurance penalty calculation

• 1: Determine the required coverage: The policy's 85% coinsurance clause means the owner should have $2.88 million in insurance coverage ($3.2 million x 90%).
• 2: Calculate the penalty: The owner only carried $2.3 million in coverage, so the property is underinsured. The penalty is the percentage of required coverage that was missing: $2.3 million (coverage carried) / $2.88 million (coverage required) = 80% payout factor.

 Loss scenario (partial). A faulty valve causes flooding on the second floor utility room. The flood is discovered relatively quickly, but damage to the kitchen and dining room are calculated at $500,000.  The payout will be $400,000 ($500,000 x 80%), a bad situation for the owner.

Loss Scenario (total). A fire broke out due to a faulty electrical panel overnight. The building is determined to be a total loss. The payout will be $1.84 million ($2.3 million x 80%), this is a terrible situation for the owner as the building will cost $3.2 million to replace and it will have less than 60% of that in an insurance settlement to do so.  

Getting insurance-to-value correct is about more than compliance or underwriting — it’s about ensuring that the policy responds as intended when a loss occurs. Brokers play a central role in closing the valuation gap by helping clients establish accurate property schedules and maintain them over time. An appraisal that captures asset-level detail, code requirements and soft costs sets the foundation for coverage that aligns with reality rather than outdated assumptions.

Accurate values are the broker’s best tool to ensure property insurance delivers when it matters most.

Brian Johnston leads Withum’s tangible asset valuation practice. Contact him at [email protected].

Anthony Venette, CPA/ABV, is a manager in Withum’s corporate value consulting group. Contact him at [email protected].

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