Valuation Article: Claims Toolbox

Does that new building exist—on your insurance policy?

By Dave Adams, AVP – Field Operations

We’ve all seen on the news the toll flooding, fire or other tragic events can have on communities. As residents struggle to rebuild and repair their lives, business owners impacted by disaster also have an uphill battle when it comes to retaining their businesses—and too often they are unsuccessful.

According to the Federal Emergency Management Agency about 40 percent of small businesses are unable to rebuild after a major loss—and simply close their doors permanently. Though there can be a number of reasons for this, having insufficient insurance coverage shouldn’t be one of them.

All too often, when reviewing property claims reports, our claims team comes across policyholders who were not adequately insured-to-value (ITV). The policyholder may have added a building to the property without letting us know, or made significant renovations that changed the value of the property. Small business owners are so focused on growing and maintaining their operations that they often neglect to update their insurers on their improvements. This can mean their property insurance policies do not provide enough coverage to rebuild their businesses as they stood just before a disaster.

With the rate of inflation and costs of building materials, electrical, plumbing and HVAC work increasing and fluctuating building code requirements, a business policy that hasn’t been reviewed regularly seldom covers all the expected expenses in the case of a total loss. Policyholders cannot afford to wait until a loss occurs to ensure they are properly covered.

Over and above the basic replacement cost or actual cash value of a building, business owners and their brokers should consider the costs associated with rebuilding, especially:

  • Debris removal, which adds an additional $20 per square foot;
  • Contractors’ bids, which tend to increase by 25 percent after natural disasters;
  • Architect fees, which should be estimated at about five percent of the rebuilding cost;
  • Building code compliance, which can be estimated at 25 percent of the rebuilding cost, and
  • The cost of “green” building updates, which can add two percent to the cost of rebuilding.

There are several strategies and tools available to help you and your broker establish accurate building values and ITV. These include:

  • Third-party appraisal. Ensure buildings are properly valued with an independent, industrial appraisal. By having an appraisal, you have eliminated the majority of issues in the event of a loss and in essence have settled your claim before it ever happened.
  • Software solutions. Businesses can also use building valuation computer software programs, such as CoreLogic. These tools factor in a variety of considerations when estimating the cost of reconstruction.

Part of the value-added services that PLM offers to our insureds are regular on-site visits from a member of our Loss Control or Business Development Departments. We often hear when discussing building values with our insureds, “I can build that building back for much less than that,” or “I sell lumber for a living and can get the material at cost.” But consider this: in the event of a widespread catastrophic disaster such as a tornado or hurricane, what is the availability of lumber, contractors, building crews, etc.?  You should consider the full impact of what being underinsured might have on your business’s future if you had to begin the rebuilding process tomorrow under such circumstances.

Our primary goal is to help you adapt and recover during trying times. One of the best ways to ensure we can do that is to make sure your property is adequately insured. We recommend thoroughly reviewing the building values listed on your policy with your broker prior each renewal date. Reach out to your insurance broker or your contact at PLM to confirm that he or she has an up-to-date accounting of your business’s property assets. A brief phone call could ensure your business stays strong and viable for the future in the event of a disaster.