Would someone be willing to share their calculation method or formula that you use in determining insurable value (ACV of a non-residential property) using the property's hazard insurance policy? Are you taking the replacement cost of the building from the hazard policy and forming a depreciation schedule? Are you first adjusting the Hazard policy's replacement cost to add or subtract other valuations?

I know using an appraisal's cost approach would generally be the simplest manner of determining this value that could be substantiated, but in the times when this isn't available, I'd like to work off the Hazard policy information.

Thank you,

I never seen anyone use hazard insurance to determine ACV and I don't know how it's possible. If someone has a formula, that would be great.

Thanks David. For some background on my inquiry, I'm referring to the top of page 19 of the 2016 Flood Q&A below, where it states lenders may use the hazard insurance policy to determine ACV, but adjustments may be necessary since Hazard insurable value is different. I was hoping to see if anyone uses this method of taking the Hazard insurable value, and what adjustments they use. I imagine it's much more complex than a simple formula, but thought I'd try.

https://www.fdic.gov/regulations/compliance/manual/5/V-6.1.pdf

"In calculating the amount of insurance to require, the lender and borrower (either by themselves or in consultation with the flood insurance provider or other appropriate professional) may choose from a variety of approaches or methods to establish the insurable value. They may use an appraisal based on a cost-value (not market-value) approach, a construction-cost calculation, the insurable value used in a hazard insurance policy (recognizing that the insurable value for flood insurance purposes may differ from the coverage provided by the hazard insurance and that adjustments may be necessary; for example, most hazard policies do not cover foundations), or any other reasonable approach, so long as it can be supported."

What this says is you can use the amount of hazard insurance as a way to determine the insurable value. However, you have to understand that hazard insurance and flood insurance are like apples and oranges. That's why it says you may need to make adjustments. I don't believe the hazard insurance is going to help you determine the ACV.

I discuss this in an article we wrote called "Flood Insurance Insurable Value." It's available (for free) at our website:
https://www.bankerscompliance.com
Click on "Free Resources" in the top menu bar;
Click on "Free Downloads"
and you'll see the "Lending Tools (Free Downloads)" box. Click on it and scroll through the list of free resources. You can see more by clicking the "+View More" link at the bottom.

I'd like to revisit this to see what other institutions are using as a method to calculate ACV on non-residential properties, if the appraisal does not have a cost approach (which most don't). What is your calculation method, if the appraisal doesn't cover it?

The 2016 Q&A leaves it pretty open ended, and a reasonable, supported approach seems overly subjective, depending on which regulator you have looking at it.

It makes it sort of difficult if you do not pull your FHD before you order your appraisal and then if in the SFHA require the appraiser to include a cost approach in the appraisal. Check to see if the other insurance are replacement or ACV policies, most are going to be replacement. Consultation with an insurance professional might be the only good approach.