At A.P. Reid, we consider consumer education to be one of our top priorities. An informed insurance buyer will made educated decisions about their insurance - ensuring that you avoid trouble down the road in the event of a claim. A.P. Reid customers benefit from the important information contained in our series of hundreds of Customer Information Bulletins. Below you will find a selection of these bulletins related to Business Insurance. Check back often as this selection will be updated from time to time.
Determining Correct Amounts of Insurance for Commercial Buildings
When you purchase insurance on a Commercial Building or Rental Property, you will need to determine a number of things:
How Broad do you wish the actual coverage to be?
Do you want Replacement Cost Insurance or Actual Cash?
Value Insurance?
All Insurance Policies are designed to settle claims for your buildings, as well as your contents, on an Actual Cash Value basis, and if it would be your intent to replace the building, the policy must be converted to a Replacement Cost format.
Actual Cash Value vs. Replacement Cost Insurance
There is no real definition of ACTUAL CASH VALUE, but it is considered to be the cost to repair or replace the damaged property less an allowance for depreciation, wear and tear, obsolescence, and other similar factors. Thus, on a partial or total loss, the amount collectible on your claims could vary considerably with the actual cost of repair or reconstruction, or replacement.
When the REPLACEMENT COST ENDORSEMENT is applied to some or all of your property, the endorsement alters the manner in which your losses are settled. Losses will be reimbursed to the Full Replacement Value using materials of like, kind and quality without deduction for depreciation. When you have property insured under a Replacement Cost Basis, the Insurance Company imposes certain restrictions before they will honor the full replacement cost.
The property must actually be replaced on the same site. If not the amount of insurance collectible will automatically revert back to actual cash value.
Insurance placed must be equal to the estimated replacement value of the property. The best method to ensure adequate insurance is to obtain an independent appraisal.
The Replacement Cost Endorsement, itself, costs nothing. Your costs incurred in insuring on a Replacement Cost basis, are in ensuring that your insurance values reflect the replacement value of your building, not the market value of the building, or the actual cash value.
The Co-Insurance Clause
Co-Insurance is a term recognized by many and understood by few. The clause exists in all insurance policies and works with your Replacement Cost Cover or your Actual Cash Value Cover, and can affect your claims settlements in a very dramatic way. When you purchase insurance on a building, insurance companies will expect that you insure the entire building, for its true complete value. In fact, when premiums are determined for the risk, insurance companies may not expect to lose the entire building and premiums and rates reflect this, but all premiums and rates are based on the premise that the amount of insurance carried equals the value of the complete building. The co-insurance clause is the insurance company's protection that if you have not insured the "complete" building, you will become a co-insurer. It prevents you from deliberately underinsuring because you feel you could never suffer a total loss.
You are required to carry insurance equal to specified percentage of the value of your property, usually eighty percent. If you do not, your losses are reduced proportionately by the percentage you are underinsured. For example, let's assume that a building you own has a replacement value of $100,000. You purchase insurance for $60,000 and the policy contains an 80% co-insurance clause. Sometime later you suffer a fire causing $10,000 damage to the roof and upper floor.
The co-insurance clause in your policy says that your insurance must have been equal to at least 80% of the $100,000 replacement value at all times, and you have violated this clause by carrying only $60,000. You become a co-insurer under the policy and your claim would be settled like this:
What did you carry? - $60,000
What you should have carried! - $80,000
Multiplied by your loss of $10,000 = $7,500.00
You would receive $7,500.00 of insurance funds to indemnify you for your loss. Because this is a partial loss causing damage only to the roof, you have no option to leave the building destroyed and sell the land, you probably will have to use your own funds to make up the difference and fix the damage. As your insurance was 25% less than it ought to have been, you become a co-insurer of 25% of your losses.
The co-insurance clause works equally with the Replacement Cost Cover and with the Actual Cash Value cover.
You can avoid becoming a co-insurer by doing the following
Make sure that the amount of insurance and the type of clauses in the policy match. In other words, don't permit a replacement cost endorsement to be in your policy if your insurance values are equal to the actual cash value of the property.
Try to determine as best you can the true value of your property; the actual cash value and the replacement cost. Determine what form of insurance you wish to carry and govern such a decision based on what you might do should the property be destroyed.
Carry adequate insurance.
Some tips
Talk to a qualified commercial insurance broker. One who understands these clauses and can help you through the maze of determining just how you should insure your buildings. Obtain an appraisal if you can which shows you the replacement cost figure, the actual cash figure, as well as the market value figure.
Find out from your broker if you and your building qualify for the stated amount co-insurance clause.
The stated amount co-insurance clause is a slightly different clause than the basic clause and it is a protection for you, the building owner, so that you don't get penalized by the co-insurance clauses. If you have an appraisal, and you insure for the appraised amounts, you automatically qualify, but sometimes you can qualify for the stated amount co-insurance clause without an appraisal.
This Bulletin is part of a series of bulletins covering a variety of insurance topics ranging from rental income, apartment buildings, claims settlement procedures, insuring stock and equipment, specified perils insurance vs. all risk insurance, crime definitions. Call us any time. We probably have the answers to your questions