The Latest Concerns Affecting the Insurance Industry Today
It’s understandable why someone would insure their building for a lower limit. It costs less. But is it too low? You need to determine what limit is right for your building in the event of a catastrophe.
When we recommend a policy for someone, we want to ensure we’ve done everything we can so that, in the event of a claim, our insured is going to be made whole and be able to get back on their feet again. The insurance industry has a few categories for building limits. Here are the top two:
1. Replacement cost: the cost of the building materials plus the labor it would take to rebuild your building.
2. Actual cost value: replacement cost (building materials and labor) minus the depreciation of your building.
Let’s say you have an older building with poor maintenance (it needs new siding, a new roof, etc.). This is going to be figured into the cash value. The benefit to actual cash value is typically you’re going to have a lower premium, which will limit the coverage that’s available to you. These limitations far outweigh the benefits of actual cash value.
An insurance policy may have a mechanism built in called co-insurance. This helps ensure that you do have a proper limit on your building but the insured typically will share in paying for the cost of any claims along with the insurance carrier. The typical co-insurance you’ll see on a policy is either 80%, 90%, or 100%. This means you have agreed that the limit on your policy is at least one of the above percentages of the actual limit and you be responsible for contributing the percentage of the costs not covered by the insurance carrier. You do get a rate decrease the higher your co-insurance goes.
The problem with a co-insurance penalty is when a building is underinsured, it may not get you back on your feet when you have a claim. For example, if you have a building that should be valued at a replacement cost of over $100,000 and you have 90% co-insurance on this building, the minimum limit you should have on your building with this policy is $100,000. But let’s say you only insured it for $75,000 and you have a $25,000 loss. The insurance company is going to see that you have property limits on your building. Your claim will be paid less the percentage that you’re underinsured. So, a $25,000 loss multiplied by a 25% underinsured rate means you will be paid at $18,750, less your deductible.
How do you determine the proper limit for your building? Start by having a discussion with your insurance agent. Ask a lot of questions, like what happens if you experience a 25% loss of your building, a 50% loss, a total loss. Let him or her know what your expectations are.
Another policy element of which you should be made aware is a wind/hail deductible, which is the amount of money you’d have to pay out of pocket before your insurance will pay out the rest of your claim for wind and hail damage.
A wind/hail deductible is a bit different than the deductibles for other types of small business insurance, as it is often calculated as a percentage of the building value (NOT a percentage of the claim amount).
For example, if you had commercial property insurance on a building worth $2 million with a 5% wind/hail deductible, your out-of-pocket cost on a $250,000 hail damage claim would be $100,000 as derived from the percentage in your wind/hail deductible as a percentage of building value (not $12,500 as insureds may mistakenly think).
Another concern is in regard to increased property claims. The Commerce Department recognizes that more severe and frequent storms are altering the insurance industry’s risk profile, sometimes dramatically, which is why the state is considering a program for pre-coverage that would mitigate the risks. The proposal, called Strengthen Minnesota Homes, is modeled after a successful 12-year-old program in Alabama (StrengthenAlabamaHomes.com) that provides grants to retrofit existing single-family homes to reduce damage from strong winds.
We know this is a lot to consider when taking out a policy for your building or business. We invite you to sit down with one of our agents who will give you an overview of what is needed and what will work best for you!