By one estimate almost 75% of commercial real estate is underinsured. Given unpredictable climate change weather and other perils this can expose your business to significant financial risk. Frequency and severity of losses have continued to increase.
Insured often get confused between commercial real estate’s market value (the selling price), assessed value (estimated value for property taxes) and replacement value (how much does it cost to rebuild). Over the past few years building costs have skyrocketed.
Insureds may not realize that commercial property insurance policies commonly have an Insurance to Value Clause (ITV). The ITV may require the property to have at least an 80% replacement cost limit to receive ‘full coverage” for the property. If it falls below the ITV, the policy may settle even partial losses for less than the full cost to repair the property damage. Meaning the insured now has to fund the difference. And with a total loss if the ITV is below the coinsurance threshold the insurer may likely be liable for only up to the policy property limit even if the policy has a replacement cost endorsement.
The consequences for an underinsured loss can be devastating. If the property has a loan, it may trigger provisions that require the insured to pay off the loan to the lender if the property owner cannot rebuild the property because of inadequate insurance coverage. This can easily lead to business failure.
Commercial policies may or may not increase policy limits due to inflation, but this is not a substitute for the insured making sure that the property limits are adequate. Insured’s need to check their property policies annually to address the rising costs of rebuilding.
Lee Norcross, MBA, CPCU, CPIA
Managing Director, CEO
(616) 940-1101 Ext. 7080