You may think you know the building's value, but that's not necessarily the case. It's important to understand that the price you paid when you purchased the property is not necessarily the actual value for insurance purposes—in fact, it's typically not even close, and there are some good reasons for that.
Real estate value is calculated based on a wide range of factors, including location, land value, and comparables, which means how many similar buildings nearby have recently been sold. Location, for example, is an extremely important consideration in a real estate valuation because, as we all know, a building in a highly desirable location will sell for a much higher price than the same building in an undesirable location.
However, the value of insurance coverage isn't concerned with the same factors. Instead, it reflects how much it would cost to rebuild the building if it was severely damaged or completely destroyed. For example, suppose the worst thing happens: a fire tears through the building, burning it down to the ground. The cost of rebuilding it as it was before would be based on the cost of the building materials, contractor labour and other similar factors. The location, land value and comparables wouldn't matter to the valuation because the land is still there—the building needs to be replaced.
That's why real estate value and valuations for the purpose of insurance coverage are almost always very different. You can't simply use the purchase value of the property to determine the value of the building when you are deciding which coverage limit to go with for your commercial co-insurance policy.