August 2, 2012 | By pioneer2_admin |
Did you know that the cost of building materials has increased in recent years? If you have not taken a look at the property values in your business insurance policies, now is the time. Reconstruction costs fluctuate over time, and you could end up with large out-of-pocket costs if you are not insuring to value.
Many people assume that when the market value for real estate is down, the cost of rebuilding is also down. However, in most areas that is not the case. The cost of reconstruction is affected by several factors including supply and demand for labor and materials, catastrophes, labor practices, new methods and materials, and the cost of natural resources. In fact, between 2010 and 2011, the cost of steel rebar, structural steel, plywood, and lumber all increased by over 10%, and the cost of copper pipe increased by more than 25%!
Business owners should be aware that there are potential negative consequences for not insuring buildings to value. When considering your property values, here are some things to keep in mind;
Worst case scenario. If you are not insuring your building for full replacement value, and you have a total loss, you could end up paying the difference between the value listed in your insurance policy and the actual cost to replace your building. For example, assume that your building’s replacement value is $750,000, but you are only insuring the building for $500,000. Now, let’s say a fire burns the building to the ground. Your insurance company would pay the amount of coverage listed in the policy ($500,000 minus your deductible), and you would be responsible for the remaining $250,000.
Watch for a coinsurance clause. A coinsurance clause penalizes a business that does not insure buildings to full value. In the event of a partial loss, the payment for the claim is reduced by the percentage of difference between the amount of value that the building was covered for, and the amount required by coinsurance. For example, suppose that you had a building covered for $500,000, but the building’s reconstruction cost is actually $750,000. With an 80% coinsurance clause, the insurance company would require you to carry at least $600,000 (80% of $750,000). Now let’s say that you had a tornado rip through the building, resulting in $100,000 of damage. The insurance company would include the penalty for failing to insure to value in the settlement. The formula used to determine the amount paid by the insurer would be the amount of coverage carried ($500,000) divided by the amount that should have been carried ($600,000) multiplied by the amount of the loss ($100,000). So, instead of receiving a payment of $100,000 (minus your deductible) for the damage, you would receive $83,333. (minus your deductible).
As you can see in the above examples, the consequences for under-insuring your property could be costly. Here are some suggestions for ensuring that you don’t find your business paying unexpected costs after a loss;
Review your coverage annually and update values as needed. The cost of rebuilding fluctuates greatly. Consider the factors mentioned above in determining appropriate values.
Talk with your insurance agent. Sit down with your agent at least once a year. Discuss the value of your property, and keep your agent informed of any renovations or additions to your buildings. Your agent should have tools available to help you avoid unexpected costs in the event of a loss.
Insurance is designed to protect you against the unexpected. By taking the necessary steps to insure your property to value, you can rest assured that your business will be fully protected if you have a loss, and that you can continue to focus on meeting your business goals.
At the Pioneer Business Insurance Agency, we work hard at being accessible, helpful, and result-orientated. Learn more about us at PioneerBusinessInsurance.com. How can we put our expertise to work for you?