Commercial Insurance
Property
“Insured to Value” What
does it mean?
The concept of “Insured
to Value” (ITV) as it
relates to most commercial
properties, such as
apartment buildings, can be
a misunderstood piece of the
insurance puzzle. Factors,
such as the cost of building
materials and labor change
constantly, which directly
affects ITV. There are
programs, such as Marshall &
Swift or Castle, that can be
used to calculate ITV. These
programs have built-in
adjustment factors for
current building industry
standards. However, among
these programs there can
still be a good amount of
discrepancy from one to
another. Throw into the
equation that most
commercial property
insurance policies have
what’s called a
“coinsurance” clause, which
obligates the insured to
insure to a certain value or
suffer a penalty at the time
of a loss.
So, the obvious question
is; “What is the proper ITV
limit for my insurance
policy?” Using one of the
Replacement Cost programs
mentioned above is a good
place to start. However,
these programs mostly
contemplate a “standard”
building quality, without
upgrades or extras. For
instance, in San Diego
County right now, Marshall &
Swift calculates the
approximate cost per square
foot to build a frame/stucco
apartment building at around
$124. But, if the building
is going to have any
“special features” the cost
could be much higher.
The problem of being
underinsured usually raises
its ugly head in the case of
a total loss. Be aware that
most commercial property
insurance policies have a
Replacement Cost provision
that reads something along
the lines of, “We will pay
the lesser of your policy
limit or what it actually
costs to replace the
building”. So, properly
insuring your building prior
to a loss occurring can be a
very tricky proposition
because the value will
ultimately be determined by
the insurance company after
the loss. The other
significant factor in the
Replacement Cost equation is
that the value of the
insured Building is directly
tied to the premium being
paid. Many building owners
want to keep the Replacement
Cost Value on the policy low
in order to keep their
insurance premiums low.
So, what is the proper
ITV? Well, that depends on
your own personality. There
are no guarantees in
insurance, but paying a bit
more premium for peace of
mind might be well worth it
if a loss does occur.
Ordinance or Law
After a major property
loss many building owners
are shocked to learn that
the cost of repair is
significantly higher than
their insurance limits
because of the need to
conform to current building
codes and current laws.
Property insurance is
written to provide repair or
replacement of the damaged
building as it was
originally built or as it
was last upgraded not to
today’s standards. This can
cause a very serious gap in
coverage and could cause the
repair process to stop or be
delayed.
With building codes
constantly changing and new
laws being issued Ordinance
or Law coverage is necessary
for most all buildings. New
codes may require new or
better sprinkler systems,
better wiring and ADA
compliance among just a few.
Complying with the new codes
will require changes in
design, and building
material which will incur
substantial additional costs
for labor and materials.
There are three parts to
this coverage:
Coverage A: Pays
for the Loss of the
Undamaged Portion of the
Building which must be
demolished and removed to
conform to new codes and
ordinances.
Coverage B:
Demolition Cost pays for the
cost of demolition or the
undamaged building required
by the new building, zoning
or land use ordinances.
Coverage C:
Increased Cost of
Construction pays for any
increase in the cost of
rebuilding to conform to
building laws or ordinances,
or to repair the damaged
building so that it meets
the current codes and
ordinances.
Many business policies
have some coverage, although
limited for coverage A & B.
These limits need to be
reviewed in light of the
estimated actual cost of
complying with current codes
and ordinances. Coverage C
is usually part of the
Replacement Cost values as
shown on the declaration
page. That limit should
include the extra cost of
complying with new codes and
ordinances.
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