Entries tagged with “Property insurance”.

If there is one benefit from the real estate bust that occurred over the past year and a half, it is that the cost for replacing your home of business may have gone down.   While it would affect your total assets, it could drive your property insurance costs down.

There are typically three different ways to look at property value:

  1. Market value - the amount of money you can expect to receive when selling the property under the current market conditions.
  2. Replacement value – the cost to replace any of the structures should a total loss occur.
  3. Use value – the amount of income your company would lose if the structure became uninhabitable or unusable for a set period.

Property insurance is based on the value of the structures on your property and the cost to replace them.  You might ask h0w this is different than the purchase price or estimated selling price?  The important factor is the value of the land.  Land will not burn up, blow away and with the exception of erosion if you are on the bank of a stream or lake will not be lost in a flood, so you have a foundation to rebuild on, or funds from a sale of the land.

With the implosion of the real estate market, it is possible that the value of your property has dropped, and you may be over insuring your property.   This could have occurred because the property was improperly valued initially (based on market value rather than replacement value), established an incorrect modifier to determine replacement value, or incorrectly estimating inflation modifiers when renewing the insurance programs over the course of several years.

In order to be sure that you are being properly covered, I suggest you have an appraisal completed on your property.  The small cost of having a certified commercial property appraiser can be recouped in reduced premiums, and proper coverage in the even there is a claim.

The property appraiser will be able to provide information on the Market and Replacement values.  These values go directly towards the true value of the property as well as the repair or replacement costs associated with to the structure.

The Usage value is something that would be identified by your organization and depending on the role of the structure can be part of your business continuity program, or a separate policy/program to replace rental income generated from the structure if the building was leased to others.

Please note that Personal Property such as copiers, computers, phones, and desks  is different from Real Property that the basic property package coverage and, while it may be rolled into the entire package, requires a separate declared value.

Once you have completed a certified appraisal, you will probably want to continue with this practice every 3 – 5 years.  This will make sure your coverage keeps pace with actual costs, and reduce the risk negative impact from co-insurance clauses in the event of incorrectly valuing the replacement costs to low.

Over the past several years I have seen and read that the price for purchasing some insurance policies has been dropping.  This can be attributed to the reduction of natural disasters, aggressive pricing from the carriers to gain market share and better management of risks to reduce the probability of a claim.  At face value, this is a very good thing.

However, in some cases, the cost of the insurance policy is being reduced because of changes to the policy that reduce the risk and subsequent costs to the insurance company.  These changes can be as obvious as increasing the deductible, reducing the amount of coverage, or exclusions of specific conditions from coverage to “hidden” changes resulting from the quality of customer service.

If these changes are part of the overall risk strategy of your organization and agreed upon prior to requesting the quote, this is a good thing.  If they are not, signing the contract without carefully considering the ramifications of the changes puts your company at a higher risk, and increases your total cost of risk.

In an article published by Risk and Insurance titled,”The Costs Creeping into Property and Liability Policies“, Philip Glick pointed out some of the changes in coverage that can leave a business with a greater exposure.   In addition to the changes listed above, one of the common “hidden” ways of increasing the premium is requiring the uninsured property value be established at replacement cost rather than an agreed upon amount, thus increasing the amount of the premium.  If the insured does not accept this demand, the underwriter can impose a very steep co-insurance penalty to the renewal policy.   Another stealth way of increasing your total cost of risk is  focusing on more stringent Loss-control  requirements (such as sprinkler system and Worker’s Compensation loss control programs).  If the organization is not compliant at a later inspection, your company will be required to put the programs into place or face cancellation penalties and loss of coverage.

It is imperative for you to carefully read and compare the proposed policy against the current program and identify where there are changes in the program.  I have typically established a spreadsheet outlining the coverage, exclusions, and requirements that have been established in the contract.  

Additionally, documenting the loss control requirements as part of the insurance company’s quote will allow you to identify potential issues and costs prior to binding the coverage.

Another trend identified by Glick is the additions of restrictions on additional insured as well as potential slow down in the claims process.  These types of issues not only affect your bottom line, but the reputation your company has with your suppliers and customers. 

Identifying these types of issues requires the careful monitoring of the claims and requests provided to the insurance company to identify trends that can affect your company and raising concerns when a slowdown or change in the quality of service happens.   It’s also important to document the strategies, time lines, documentation requirements and expectations for claims that may be filed.  This agreed upon process will help speed the claim process along and can be used as a measurement for quality purposes.

I had an experience like this when my main insurance broker presented a proposal for an area that was currently serviced by another provider.  Promising that the policy exceeded the current coverage at significantly lower prices, they pushed for immediate acceptance of their program and the cancellation of the other policy.

When I completed a side by side comparison of the current and proposed policy I found that the proposal provided significantly less coverage to our owner operators and could leave some of our contractors exposed to additional risk.  It took some significant negotiations to bring the proposed policy up to an acceptable alternative to the current policy while still maintaining a reduced price.