Building owners may tend to overlook some important considerations when securing insurance for a building. As a result, they may find themselves grossly underinsured in the event of a claim. In light of several recent large-scale natural disasters, now is an appropriate time to highlight some of the primary factors that could have a substantial impact on your coverage in the event of a major local natural catastrophe. Here are a few key matters of concern that owners should keep in mind:
Getting an Updated Building Appraisal
Should your building experience a partial or total loss, you do not want to be in a position where there are inadequate funds to repair or reconstruct. In order to ensure that the building is insured at the proper limit, a professional appraisal is required. Only by commissioning an appraisal will you have an accurate assessment of the building replacement value. This value will include current market prices for materials, labour, equipment and any additional costs for complying with current bylaws. It is particularly important to get an updated appraisal after the building has undergone upgrades as it is likely that the value would have changed significantly upon completion.
Reporting the Appropriate Gross Rental Income
A common mistake made by property owners is providing the current rent roll when asked to report gross rental income, or presuming that a one-year timeframe would provide sufficient coverage. The rent roll being provided should actually be a projection of gross rental income two years ahead. Why? If a claim occurs during the policy period and the gross rental income was taken from the time the policy was secured, there is a high chance of underinsurance. At the same time, it is likely there will be a dramatic surge in demand for the services required to repair or replace the asset, leading to longer time requirements than one may initially expect.
Being underinsured could cost you even more than you would expect. Insurers operate on a 100 per cent co-insurance basis when it comes to gross rental income. Co-insurance is one of the least understood insurance concepts but can significantly affect the amount of coverage that is paid out. It is the requirement in your building policy that you insure your property or income stream to an appropriate level. Otherwise, a penalty is applied. Should a partial or total loss occur, and the adjuster finds that the building was underinsured; a penalty of 100 per cent is applied for the discrepancy. As the building owner, you would be responsible for the difference in the gross rental income.
The possibility of an earthquake affecting the Lower Mainland is a very real threat. Being in the Cascadia Subduction Zone, a subduction quake, as experienced in Chile and Japan, could be devastating. Generally, the only thing you can do is prepare and be ready in the event that an earthquake occurs. There are steps that you can take to minimize the potential for damage to your building, but beyond those preparations, including earthquake insurance as part of your current policy is essential.
It is therefore important to understand how earthquake insurance works. Earthquake insurance covers loss and damage to both your building and fixed improvements due to an earthquake (but your specific policy likely stipulates the timeframe which will constitute one ‘event’). This is very important as you may be responsible for paying a very substantial earthquake deductible. Earthquake insurance carries a separate deductible (the amount you pay should a claim occur) from all of your other insurance. This deductible is affected by many factors, including your location and limits of insurance. Earthquake deductibles are much higher than a standard policy deductible, typically applied as a percentage of insured values (i.e. 10 per cent of insured value with a minimum of $100,000 – If your building is insured for $15,000,000, you would be responsible for a $1,500,000 deductible payment).
Given the enormous cost of repairs and the potential length of time repairs could take following a catastrophic event, planning ahead is essential. Being prepared means not only taking the recommended steps to ensure the safety of all those in your property, but also securing the proper insurance coverage for a quick recovery. Many businesses in affected areas are not able to rebound from losses suffered as a result of large natural disasters. What types and how much coverage you need is something that each individual property owner needs to determine for themselves, with the help of a professional risk advisor.
David Green is a client executive, vice president at CMW. He specializes in providing industry-leading insurance and risk solutions to building owners and developers. Contact David Green [email protected] or 604.678.3557 for more information.