An estimated 75% of commercial properties are underinsured by 40% or more! Are you?

According to industry data, an estimated 75% of commercial properties are underinsured by 40% or more. How can that be?

First, let’s talk about the impact of being underinsured:

Lack of sufficient coverage following property losses will force you (the insured) to pay out-of-pocket expenses to fully rebuild. Depending on the severity of property losses and associated rebuilding operations, paying these costs out of pocket could lead to major financial setbacks and - in certain scenarios, bankruptcy.
Property undervaluation can sometimes result in coinsurance penalties. Most commercial property insurance policies include coinsurance clauses, which encourage you (the policyholder) to carry reasonable and accurate amounts of coverage. Under a coinsurance clause, you are often subject to a penalty - generally, a reduced payout - if your coverage limit is not at least equal to a predetermined percentage (e.g., 80%) of the value of your property.

Why are so many commercial properties undervalued?

Undervaluation may stem from ineffective property valuation, intentionally underestimating costs in efforts to secure reduced premiums, or being impacted by factors outside of a business’ control - such as inflation or lack of availability of contractors.

Let’s go over what we can control - property valuation. Insurance coverage is based on a calculation called ITV or Insurance to Value. The goal is to have the insurance coverage be as close to actual replacement value as possible. The challenge is in determining the actual replacement value. Is this based on Market Value? Assessed Value? Or Cost to rebuild?

Replacement property values could/should include:

Indirect costs - such as consulting fees, engineering services and other expenses not directly associated with rebuilding.
Property age - In the case of older structures, property valuations should include additional construction costs that may arise from upgrading outdated building materials and equipment. These costs can be added with a building ordinance endorsement to your policy.
Building codes - Older properties may also require certain modifications amid the rebuilding process to comply with modern building codes (e.g., plumbing improvements, energy efficiency upgrades, sprinkler system changes and safety enhancements). Again, these costs can be added with a building ordinance endorsement to your policy.
Property accessibility - Properties situated at steep locations or adjacent to neighboring structures may need to have bracing or other safety measures put in place during demolition and rebuilding operations to ensure accessibility.
Unique features - Some custom property elements (e.g., stained glass) could necessitate specialized construction work, elevating rebuilding costs.

Ways to Improve Property Valuations

Find a reputable appraiser. Be sure to find a firm that follows the Uniform Standards of Professional Appraisal Practice and the Code of Professional Ethics and Standards of Professional Practice from the Appraisal Institute.
Seek additional resources. In addition to getting an appraisal, there are additional industry resources, reference guides and validated tools available to help ensure accurate property valuations. Specifically, the Marshall & Swift Valuation Service Cost Manual is a tool that is widely accepted by insurers. This resource features more than 30,000 component costs across 300 building occupancies that can be referenced when conducting valuations.
Consult other parties. Determining the value of a property should be a team effort. Make sure to compile a variety of property data from multiple qualified parties (e.g., accountants, contractors, real estate experts, risk managers, insurance professionals and chief financial officers) when making valuation decisions.

Keep your Valuation current!

The value of a property is always changing. This means it’s imperative to update property valuations on a regular basis. For instance, appraisals should be conducted at least every three years. Take note that property valuations may need to occur even more often. The frequency will depend on factors such as changing property exposures, altered operations, building upgrades or modifications, the implementation of new technology or equipment on-site, shifting market conditions and property construction trends (e.g., inflated labor and material costs).

Conclusion

It’s best to work closely with trusted insurance professionals when updating property valuations to maintain ample coverage and prevent coinsurance penalties. We want to help you stay protected when covered events occur and avoid potential coinsurance penalties. Contact us today for additional insurance guidance and solutions.