Insurable Value is the portion of value of an asset that is acknowledged or recognized under the provisions of an applicable loss insurance policy. Insurable value differs from market value in several important aspects. Market value uses the replacement or reproduction costs of building components as simply the starting point, followed by addition of site improvements, deduction of depreciation from physical, functional, or external factors, and addition of site value. In contrast, although the primary estimate of replacement or reproduction cost is done in the same manner, Insurable Value does not typically reflect site improvements, some forms of depreciation, or site value as components. Within the context of what is and is not covered, the defining document for coverage is the existing policy.
The question to be answered is not what the real estate could be sold for, but what it would cost to replace those items as covered under the existing fire and extended coverage insurance policy. Although not an opinion of value, it has become commonplace for lenders to request an estimate of insurable value along with an opinion of market value. Further, an appropriate level of insurance is of apt concern to business entities, both from the standpoint of cash flow management (ensuring that a property is not over insured) and from a security standpoint (under-insured).