Commercial Property Insurance – How much is enough

What is enough and how do I know when I have reached that amount? The age-old question we all want answered.

four story office building with trees in the frontFirst you must determine if you want full Replacement Cost/Value (RC) or Actual Cash Value (ACV) which is replacement cost minus depreciation.

  • “Replacement cost” is based on the cost to rebuild with like kind and materials as your current building. Sometimes this can be more than you realize or less than you paid. We can always help you, but also visit with a local contractor.
  • “Actual cash value coverage” is generally replacement cost less depreciation.

This decision involves several options and considerations.

  • Location, location, location, if that is important it needs to be factored into the decision process.
  • Usage or suitability – If your current building has unique features such as a fire pole instead of an elevator those items need to be factored.

This process first starts with how much insurance is enough to replace my property.

  • Locate a professional to do an actual appraisal on the building.
  • Talk to a local contractor. But remember it is cheaper to build new than it is to replace.
  • Check with your agent they can use the company’s replacement cost estimator.

Other considerations to be included are:

  1. The expense of clearing debris from the site.
  2. The cost of Architected drawings and designs.
  3. Changes in building codes that require improvements or features not previously included.
  4. And of course, the inflation associated materials or labor following a major catastrophe.

Debris Removal – This is an additional expense you wouldn’t incur if you were building from scratch. All insurance policies pay for this expense, but some pay more than others.

Some policies pay debris removal expenses in full, but the payments reduce the amount of insurance available to replace the building. Other policies cover debris removal expenses only up to a certain percentage of the amount of the loss (25 percent is typical), but that payment still reduces the amount of insurance available to cover damage to the building. Most policies provide a small additional limit (as low as $10,000) for debris removal expenses that exceed the amount of loss on the building or the percentage limitation. Higher amounts are generally available so ask us to quote a higher limit if you think you need more.

Building codes – if your building is very old, codes most likely have changed. If your building is badly damaged, you may be required to rebuild to new more stringent building codes. You my even be required to demolish undamaged parts of the building if the damage exceeds a certain percentage of its value.

Most commercial insurance policies include a small amount for rebuilding to code usually around $10,000 or sometimes a percentage of the limit like 5 percent. Most insurance companies offer an additional limit for building code coverage for an additional premium.

To cover these cost you must purchase additional coverage or increase the limit of insurance to account for this exposure.

Inflation – We all have seen the devastation caused by hurricanes. tornadoes and even water surges and if you have tried to hire a tradesman or gone to your neighborhood home improvement store you know the effect that these major events carry, even when far away from us.

You can call in for an increase following such an event, if you remember. To protect against such a situation, consider adding a “cushion” to the amount of insurance you select.

Whose Job Is It to Determine the Proper Amount of Insurance?

Ultimately it is your responsibility to establish the value of your property and select the amount of insurance for your policy. We want to help and guide you toward making the right decision and what you can do to avoid an unpleasant surprise after a loss.  Call us! 214-265-1221