From a catastrophic natural disaster to a ransomware attack to an essential piece of equipment breaking down, business owners need to be sure they are purchasing adequate insurance to stay ahead of any risk exposures.

Accurate property valuations are an essential component of any property insurance program. Yet, companies often unknowingly underreport the value of their property assets, potentially leaving them underinsured.

Business owners must provide complete, in-depth information about their property to support accurate valuation. This includes the size, age and use of the property, as well as any specific or unique construction details.

In the past, annual valuations changed about 2%-3% each year. Recently, those changes have been as high as 5%-8%, according to The Hartford's data. Consequently, it's a best practice for property valuations to be revisited at least annually to ensure a business is insured for the full price of replacing an essential piece of equipment and alleviate the need to pay the difference out of pocket, which can be devastating for a business.

Reconstruction costs have been impacted by inflation, which makes it even more critical for companies to provide their insurer with the actual cost to replace property or equipment, not the book value. There is a big discrepancy between book value—which is what the company said it cost to acquire the equipment or property—rather than the full replacement value.

Best Practices for Accurate Property Valuations

Agents should help property owners consider the insurance to value (ITV) ratio—the ratio of a property's insured value relative to what it would cost to replace that building—when purchasing property insurance.

The more information and the more detail an insurer has about the makeup of a property, the more granular and accurate the building valuation assessment will become. Agents should ask property owners to disclose the following when acquiring coverage:

• Protective features, such as sprinkler systems.
• Permanently installed or attached equipment in the building.
• Specialty construction features or building components.
• Warehouses and the value of inventory sitting within them.

Additionally, companies should also consider one-time costs versus reoccurring costs during a potential loss. For example, if an operation is down for several months, the company will need to relocate its operations. This means paying rent and electricity bills at an alternative site, while still paying the bills for its existing location and the cost of the repairs there. The company will have extra expenses to cover the temporary repairs while they are making permanent repairs to the facility.

Property owners should also let their insurers know of any seasonal inventory fluctuations, such as if there is a time of year when the company might have twice as many goods as normal. Understanding peak values is crucial if there is a loss.

Companies that fail to provide an accurate valuation of their property and assets put their business at risk for long-term financial consequences. With inflationary pressures persisting and increased global risks, it's essential that business owners partner with their agents and insurers to reassess their property valuation each year as part of their overall risk management plan.

Ryan Carney is head of property and marine product at The Hartford. Caleb Woodby is chief property and marine underwriting officer at The Hartford.