Do you own a timeshare or condominium or are you considering a purchase of a timeshare or condominium? If you answered yes to this question that it is important for you to understand what an insurance valuation is, so take a few minutes for a brief education on the matter.
What is an Insurance Valuation?
An Insurance Valuation (sometimes called an insurance appraisal) provides a third party, unbiased valuation of the property's replacement cost for insurance purposes. This valuation report is designed to be used as a guide to assist the board members and their insurance agent in determining the proper amount of insurance coverage. (It is not to be confused with a real estate appraisal which gives a fair market value price of the property which includes the land value)
The study should include the following elements in a clear, easily understood format:
· Statement of terms and conditions
· Report definitions for clarification
· Summery of total values of the complex
· Values of each structure
· Insurance exclusions that apply
· Depreciation values
Why Do We Need an Insurance Valuation?
1. Florida State Statute 718.111 requires the condo association building to be insured to replacement value, and the replacement value must be obtained from an independent insurance appraisal or update of a prior appraisal and done at least every 36 months.
2. The Insurance Valuation establishes an estimated replacement cost for each structure in the complex. This ensures that an adequate amount of insurance coverage is carried to prevent against loss.
3. The valuation helps to document the accountability of the board with regards to stewardship and fiduciary responsibility when they "obtain and maintain adequate insurance..." for the condominium property.
Now, this sounds a little like a reserve study doesn't it... they are both giving you replacement costs, right? This is a common question from owners that have community shared elements at their property... but the answer it no.
Even though the same common area components are included in both, the insurance valuation and a reserve study, these reports are different financial tools with different purposes.
The insurance valuation will tell you the amount of insurance you should carry in case something happens to the property, this valuation should be done annually so adjustments can be made. The reserve study on the other hand details each components replacement cost in the future, when it is expected to need repair or replacement based on age and usage. Let's look at the reserve study basics so we can make a better comparison.
What is a Reserve Study?
A Reserve Study is a technical and financial analysis of the community-owned assets within a common interest development. The study should include the following elements in a clear, easily understood format:
Component inventory and details
Remaining useful life estimate of inventory
A current replacement cost estimate for each component
An analysis of the association's current financial condition
A funding model summary
Funding recommendations, including a 30 year projection
Appropriate disclosures
The American Institute of Certified Public Accountants (AICPA) and the Community Associations Institute (CAI) have both published guidelines which dictate minimum requirements for what constitutes a thorough reserve study.
Why Do We Need a Reserve Study?
1. The Reserve Study establishes a schedule by which funding for the maintenance, repair and replacement of major common area components are achieved.
2. This funding schedule provides assurance to property owners that funding to maintain the property will be available when needed.
3. Community members are assured that their investment in the community will be enhanced over time through an equitable and systematic approach to accumulating the replacement reserves.
4. For those responsible for the governance and management, the well prepared reserve study is an invaluable management tool; providing community Boards and managers with the information they need to better engage in long range planning and advance scheduling of major component repair or replacement.
5. The Reserve Study provides accountability in the form of a written, historical record and helps to document the accountability of past managers and association boards with regard to the stewardship of association assets or reserves.
6. A comprehensive and credible Reserve Study is the only way to be assured that the association dues, paid by community members, are the result of an equitable reserve funding program.
If you still need more information or clarification, please feel free to contact a Reserve Industry professional.
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