When insuring real estate, it is sometimes tempting for commercial real estate owners to consider the “high level” points associated with one’s insurance program, such as total insured limits and final premium charge, however commercial property insurance is an arena in which a common adage holds true – “the devil is in the details.”
Whether a client owns hundreds of real estate assets or just a few properties, there are many common elements of a property insurance program that should be considered while placing coverage.
Insured Limits and Valuation
Obviously, in the event of a disastrous claim, most clients seek to be “made whole” by their insurance policy – in other words, if a property is totally destroyed by a covered cause of loss, it follows that one would generally want insurance to pay for the entire cost to rebuild. A policy’s ability to respond in this fashion is not automatic; most property policies will only respond up to preset limits, and will respond according to prearranged valuation methods:
- Replacement Cost: The amount required to replace damaged property completely, using new materials and furnishings.
- Actual Cash Value: Generally the Replacement Cost of insured property, with a deduction for depreciation (in other words, the age of property factors into the claim adjustment process).
Clearly, Replacement Cost is superior to ACV in most cases; the bottom line is that there is a big difference in the way claims are handled between the two methods, so they are certainly both worthy of consideration.
Coinsurance
Occasionally, property owners will be tempted to take some risk in setting limits in an effort to save money on premiums, and possibly seek to implement coverage limits that would not truly be adequate to replace covered property in the event of a real life “total loss.” This may be acceptable with some property insurance underwriters, however many will require that insureds “insure to value,” and implement “coinsurance” clauses to ensure this occurs. With a coinsurance clause (most are either 80% or 90%), a property insurer is stating that if the total insured limit is not at least a certain percentage of the true Replacement Cost at the time of a partial claim, then the property owner would be penalized by some ratio representing the % by which the property is underinsured. Oftentimes, coinsurance clauses can be negotiated out of policies in exchange for a signed “statement of values,” or other evidence of insurance to value.
Deductibles
Most property insurance policies will pay out subject to a deductible, for which the policyholder is responsible. This seems straightforward, however it is important to note that deductibles may vary depending on the peril insured against. For example, a property insurance policy could have different deductibles for each of the following different perils:
- “All Peril,” or standard causes of loss like fire, water damage, etc.
- Earthquake
- Flood
- Equipment Breakdown
- Business Interruption
- Wind/Hail/Named Storm/Hurricane
- Per-Unit Deductible (for condo buildings, for example)
- Ice Dam or Water Damage Deductible
It’s very important to make sure that all deductibles are clear when placing coverage – it is not uncommon for certain deductibles to be less obvious than others when reading a policy document.
Sub-Limited or Excluded Areas of Coverage
Property insurance, like most areas of insurance coverage for complex risks, must be specifically tailored by an experienced insurance professional who is knowledgeable about the client’s business. The following is a non-exhaustive list of exposures that may or may not be automatically included within a standard commercial property insurance policy unless specifically addressed:
- Equipment Breakdown coverage
- Business Income/Business Interruption/Extra Expense Coverage
- Ordinance or Law Coverage (Loss to Undamaged Portion, Demolition Costs, Increased Cost of Construction due to Code)
- Water/Sewer Backup
- Earthquake
- Flood (or other naturally occurring water damage)
- Business Personal Property (qualifying items owned by the business but not attached to the structure)
- Production machinery or owned equipment
- Leasehold Improvements
- Property of Others in your care/custody/control
In short, while premium charge is certainly an important factor when placing insurance coverage for commercial property, there are many other factors that must be addressed to ensure that coverage responds favorably in the event of a loss. A good insurance broker will know how to properly structure coverage while also finding the best rate from a reputable insurer.
About NorthStar Insurance Services
NorthStar Insurance Services, Inc. is an independently-owned insurance agency founded in 1995. As one of New England’s largest independent insurance agencies, we take a hands-on, personalized approach to servicing our clients and providing industry expertise and solutions for businesses, individuals, and families. To learn more about how we can help you with your insurance needs, give us a call at (800) 301-1944.