With the influx of natural catastrophes, one of the main issues is not that property owners lack insurance but instead lack sufficient limits.
Understanding the current value of your critical assets (i.e. building or a piece of equipment) is crucial. Determining the correct value before a loss will greatly increase the potential for an insurance settlement that truly puts you in the same financial position after the loss.
- Do you have an up-to-date inventory listing of all furniture, fixtures, equipment reflecting current replacement cost?
- Have you taken a serious look at the construction cost to rebuild your structure(s)?
- Are you aware that if upgrades and improvements are done to your structure, you should adjust your building insurance value?
- If you have property of others in your possession, have you taken this into consideration when determining your insurance coverage and values?
Most businesses will never have to go through the experience of a major property loss but if you do, wouldn’t you want to make sure the appropriate loss exposure is transferred to your insurance carrier?
The building limit selected for your insurance policy should represent the cost to rebuild the structure, with like kind and quality, in the event of a total loss – not the real estate market value of the building.
You are responsible to select your insurance building value so how do you keep current with the rising costs to rebuild? The best option would be to contact a contractor and obtain an estimate to rebuild your structure as it stands today. This may not always be feasible so other options may need to be pursued such as building replacement cost softwares.
The standard insurance property form includes the following in the definition of a building:
- completed additions
- fixtures including outdoor fixtures
- permanently installed machinery and equipment
- personal property owned by you that is used to maintain/service the building/structure or its premise including: fire extinguishing equipment, outdoor furniture, floor covers, appliances used for refrigerating, ventilating, cooking, dishwashing, laundering
Often many carrier policies are amended to include foundations as well. If so, the value must be included in your building limit.
What happens if my limit is insufficient?
If your limit does not represent 100% of the cost to replace the building, then you will be underinsured in the event of a total loss. However, you also can incur a penalty for a smaller partial loss if your building limit does not meet your policy coinsurance requirements. For example, with an 100% coinsurance clause, if your building’s 100% value is $100,000 and you elect to only carry a limit of $80,000:
- In the event of a total loss, you would have to personally fund $20,000 of the loss.
- In the event of a partial $10,000 loss, you would only collect $8,000 less your deductible leaving you to personally finance $2,000 of the loss plus your deductible.
What if I am required to “update” my building to comply with current codes or ordinances?
Your standard policy does not include coverage for any “upgrades/changes” required during reconstruction to comply with local, state, or federal codes or ordinances. You would need to purchase “Ordinance or Law” coverage which is provided in three coverage sections:
- “Ordinance” – accounts for the cost to rebuild the undamaged portion of the building if required by code to demolish the undamaged portion. This coverage is included in your building limit.
- “Demolition” – provides coverage for cost to demolish the undamaged portion of the building if required by code to demolish.
- “Increased Cost of Construction” – provides coverage for the additional cost incurred to repair or rebuild to current code.
The amount of coverage required for this truly varies building to building impacted by the age of the building and renovations that have been done throughout the years.
Business Personal Property (BPP) Valuation
In order to determine the proper limit for your business personal property, you should maintain an inventory of items included within the below policy definition. The cost to replace each item with like kind and quality should be referenced if your policy valuation is “Replacement Cost” (RC). If you have an “Actual Cash Value” (ACV) basis, then the “book value” should be utilized.
The standard property insurance form includes the following in the definition of Business Personal Property if located in or on the building or in the open (or in a vehicle) within 100 ft of the described premise:
- furniture and fixtures
- machinery and equipment
- other personal property you own and use in your business
- labor, materials, services furnished or arranged by you on personal property of others
- your use interest as tenant in improvements and betterments
- fixtures, alterations, installations or additions made a part of the building/structure you occupy but do not own and you acquired or made at your expense but can not legally remove
- leased personal property which you have a contractual responsibility to insure
- personal property of others that is in your care, custody or control (only for the account of the property owner)
What is typically excluded from BPP*?
- Accounts, bills, currency, evidences of debt, money, securities
- Automobiles held for sale
- Bridges, roadways, walks, patios, other paved surfaces
- Land, water, growing crops, or lawns
- Electronic data
- Cost to replace/restore valuable paper/records information
- Property while airborne or waterborne
- Vehicles, self propelled machines/autos used on public roads
- Bulkheads, pilings, piers, wharves, docks
- Underground pipes, flues, drains
- Grain, hay, straw, crops while outside of building
- Property specifically covered via another coverage form
- Separate coverage may be available to cover the above items
What is coinsurance?
Most commercial property policies contain a coinsurance policy provision that stipulates the minimum amount of property insurance that must be carried. The standard options are 80%, 90%, or 100% of the replacement cost value.
If your limit carried is not equal to or greater than your coinsurance percentage of your full property replacement value, you will be penalized at the time of a claim.
Standard Property Valuation Options
Replacement Cost (RC): Pays the cost to replace the damaged property with like kind and quality used for the same purpose. This does not include ordinance or law costs.
Actual Cash Value (ACV): Pays the cost to replace the damaged property with like kind and quality LESS depreciation.
Agreed Value (AV): This is typically done in conjunction with RC and waives the policy’s coinsurance requirement.
Selling Price: Used for finished goods, it pays the cash selling price less any customary discounts and expenses that otherwise would be incurred.
Tenant Betterments & Improvements
Improvements and betterments are defined as anything that a tenant attaches to the landlord’s real estate that will become a permanent part of that real estate. When the tenant vacates the premise, the items will remain attached to the building. Since the improvements can be essential to business operations it is important to clarify who has responsibility for replacing them if they become damaged.
A lease or separate written agreement can require the landlord to repair or replace the improvements along with the building. More often though, leases stipulate that the tenant is responsible to insure the improvements.
If the lease does not address the issue of responsibility between the Building Owner and Tenant for the damaged improvements and betterments, the Building Owner can be assessed a coinsurance penalty for not minimally insuring the building to the coinsurance percentage. Building Owners can avoid the coinsurance penalty by attaching an endorsement to their policy that would exclude coverage for the improvements and betterments. There is no premium charge for this form.
If the lease specifies that a tenant is responsible for improvements and betterments then the value needs to be considered when establishing the amount of property insurance a tenant needs to buy.
Regardless of who the lease stipulates is responsible for insuring, the lease normally will include a mutual waiver of subrogation which means both the landlord and the tenant waive their right to recover damages from the other party, even if the other party may be responsible for the damage. A waiver of subrogation will not impair insurance recovery.
Improvements and betterments are a rather simple item to insure. The building and business personal property forms also provide automatic coverage for them so it is just a matter of including their value in the insurance limit purchased. So whether you are a tenant or a landlord make sure the lease terms are clear to who is responsible for improvements and betterments.
How is “unique” property valuation handled?
A standard property Replacement Cost loss valuation would not be sufficient for an item with intrinsic value – such as historic buildings, antiques, fine art, etc – that can not be “replaced” with one of similar like, kind, and quality. Leaving your insurance company to define “like and kind quality” doesn’t guarantee that your property will be replaced with matching property and may not include utilizing a restoration specialists or artisan craftspeople.
There are better solutions. Either scheduling property for a specific limit that has been verified by an appraisal or having a policy with a specialized loss valuation, such as your cost plus 30% or your selling price less 20% would be more beneficial at the time of a claim. Other options may be better suited for your specific needs.
How we can help you…
If obtaining an estimate to replace your structure in the event of a total loss is not feasible, our agency can assist by providing you with a building replacement cost estimate utilizing Marshall Boeckh Swift (MBS) software common to the insurance industry. The MBS arrives at a value by utilizing an average cost to rebuild based on basic details of your building. We can also review your business property value to assure it minimally meets the coinsurance terms of your policy and work with the carrier to obtain the best possible loss valuation for any unique property which you may own.
Contact us to begin this thorough review and reduce your financial impact at the time of a claim. email@example.com