With the rising cost of labor and supplies, replacing a damaged building is becoming more expensive. As a result, business owners should review their policies to ensure their buildings are insured at a value to adequately cover the replacement cost — or they could face a co-insurance penalty at the time of a loss.
“It doesn’t become an issue until you have a claim,” says Nate Bell, CIC, commercial insurance specialist at Zito Insurance Agency, a division of Risk Strategies. “An adjuster will assess the damage and look at whether you are insuring to value. They’ll evaluate actual replacement costs, and if you are underinsured, they won’t pay the full value of the damages.”
Bell says owners are required to insure to at least 80 percent of the value of the building, and if you are carrying less, a co-insurance penalty comes into play. For example, if your building is valued at $1 million and you only have it insured at 70 percent of value, the insurer will only pay 70 percent of the claim.
Smart Business spoke with Bell about the importance of insuring to value on and how to make sure you can recover from a loss should damage render you unable to operate.
Why is now a good time to review your building insurance coverage?
This is a unique time, with rising replacement costs and delays due to supply chain issues and a lack of available skilled labor. Owners should review their policies at least annually to ensure they are carrying adequate coverage. Most insurance agents can help you do that, with software to do a replacement cost valuation based on type, materials, location, etc.
Overall valuations are up 16 percent and lumber costs are up 28 percent, driving up replacement costs. Educating insureds is the first hurdle, and owners are often surprised to discover how much costs have increased. For example, replacement value for large warehouse has historically been $80 to $100 per square foot and is now $125 to $150 a square foot, a significant increase. As a result, it is critical that you regularly update values in your policies to account for rising costs and protect your business should disaster strike and you need to rebuild.
What other Property Insurance Coverages should be reviewed?
Business Interruption limits should be reviewed for adequacy. With delay in supplies, it likely will take longer to repair or rebuild your building, so you may need to consider increasing your limits of insurance to account for these potential delays.
A business interruption limit with 12-month actual loss starts from the time of the claim and continues for 12 months. That sounds like a no-brainer, because there is no dollar limit; it covers loss net income and ongoing expenses you incur. However, if a building is a total loss and requires demolition and debris removal, and approval for new building permits, from start to finish could be longer than 12 months. But after 12 months, you are no longer covered. So you may want to consider a specific dollar limit for business interruption.
You also need to consider contents limits. Just like the building, the contents need to be evaluated, as replacement costs for those items are also going up.
What would you say to owners who dismiss the risk to their building?
Too many owners think nothing will happen, and even when they learn about the co-insurance penalty, they say they are willing to take the risk because they don’t feel they will have a claim. And while it’s very unlikely your building will burn to the ground, if it does and you need to rebuild and are underinsured, being unable to recover from that major loss can impair or even bankrupt your business.
Even if you think it’s never going to happen to you, protecting your building and its contents is critical, as they are likely the most valuable things you own. Based on the current environment, with the rising cost of material and labor, now is a critical time to evaluate your buildings and property limits. Do it before you have a claim and discover you either aren’t covered or are subject to the coinsurance penalty. Being underinsured puts you at risk of going out of business. ●
INSIGHTS Business Insurance is brought to you by Zito Insurance Agency a Division of Risk Strategies.