The adverse financial effects of a property loss might occur in one or more ways: -
· Reduction in the value of the property
· Loss income
· Increased expenses
Reduction in Value of Property
When a property loss occurs, the property is reduced in value.
If the property can be repaired or restored, the reduction in value can be measured by the cost of the repair or restoration. Property that must be replaced has no remaining worth, unless some salvageable items can be sold as junk. If an item is lost, is stolen, or otherwise disappears, its value to the owner is reduced just as though it had been destroyed and retained no salvage value.
A further reduction in value might occur if repaired property is worth less than it would be if it had never been damaged.
Property might have a few different “values” depending on the method by which the value is determined. The most common valuation measures used in insurance policies are replacement cost and actual cash value and also Agreed Value.
Lost Income
When property is damaged, income might be lost because the income producing capacity of the property is reduced or terminated until the property is repaired, restored or replaced.
Determining the amount of business income that might be lost due to a property loss requires estimating the future level of activity of an organization and doing a “what if” analysis. This analysis involves projections of the organization’s revenues and expenses in normal circumstances to determine the amount of income that would be lost in the event of a property loss that disrupts normal operations. The comparison of projected revenues and expenses reveals the potential loss of income.
Rental property also poses a similar situation because rental income would be lost, if the property were damaged and the owner would continue to incur some expenses such as mortgage payments, taxes, etc.,
Increased Expenses
When a property is damaged, in addition to the declination in value, the owner or the other user might incur increased expenses in acquiring a temporary substitute or in temporarily maintaining the property in usable condition.
Property Loss Exposures
