Over the years I have found that one of the biggest gaps on a property policy is the limits of insurance on the building. The building limit is not only underinsured but the client also has Co-Insurance. There is this huge misconception that if the policy states replacement cost that the building is covered to replacement value and that is not entirely accurate. Co-Insurance is on most commercial property policies unless it is waived. So what is Co-Insurance? The word itself describes it perfectly. The owner of the building is coinsuring with the carrier. I will give you an example:
ABC Manufacturing has a building insured for $2 Million with 80% Co-Insurance and a $5K Deductible. The Building is 25,000 square feet. ABC Manufacturing has a fire in one of the clean rooms that has a valued loss of $500,000. The adjuster from XYZ Insurance Company comes out to evaluate the damage. The adjuster has determined that the building was under valued at $2 Million and should have been insured for a minimum of 2.5 Million. The Insurance Company Pays $395K of the claim. The Insured (ABC Manufacturing) Pays $105,000 Why? How?
ABC Manufacturing had a Co-Insurance Clause.
Did/Should x The Loss = What Insurance Company Pays – Deductible
$2,000,000/$2,500,000 X $500,000 = $400,000 – $5,000 = $395K
How does your company prevent this from happening?
Make sure your building is insured properly – On average it is best to estimate the building cost to replace between $100 to $150 per sq ft.
If you have more than one building make sure that you have Blanket Coverage for all Buildings.
Waive Co-Insurance – this may cost you a little more up front on your insurance but cost of building is an ever changing market. The best way to prevent paying a large portion of a loss is to waive the coverage. How do you get the coverage waived?
Contact your broker to have an Agreed Value Endorsement added to your policy.