As a firm’s risk manager, it is your responsibility to ensure the proper amount of insurance is purchased to cover any damages to the firm’s property and assets. In order to purchase the proper amount of insurance to cover these cases, the risk manager must determine how much the property and assets are worth. Determining the worth of the property can be done in two ways: actual cash value and replacement cost.
Actual cash value vs replacement cost (2007) defines actual cash value, or market value, as the value of the property or assets that one might expect to receive if it were sold on the market. One interpretation is fair market value, considers the price without time constraints while another interpretation (favors insurance companies) includes depreciation.
Replacement cost is the cost to actually replace the property or assets (Actual cash value vs. replacement cost). This takes into account the cost of materials and labor at the current prices. Essentially, this is similar to actual cash value however, it never includes depreciation.
Of the two, the replacement cost figure is of more use to the risk manager. The calculation used favors the purchaser as the property will be paid for in full. For example, if decade old building is purchased at 400,000, it is safe to assume this is the actual cash value (market value). The risk manager must avoid purchasing insurance based on this figure alone. Instead the risk manager can decide how much insurance to purchase using an appraisal firm to calculate replacement cost. In lieu of an appraisal firm, the risk manager may use square footage data and a general contractor to get a better estimate of the actual replacement cost versus the market value.
Work Cited
“Actual cash value vs. replacement cost.” (2007). Web. 22 Jun. 2016.
