There has been increased focus on accurate replacement costs for commercial buildings, in part due to the large construction cost increases, demand/supply imbalance, and disasters. Reinsurance costs and availability have played a part also.
Commercial buildings are underinsured for many of the same reasons that residential properties are underinsured. Both face many of the same risks by underinsuring. However, if a business does not have enough coverage to rebuild properly, it can affect the owner’s income, employees’ jobs and the long-term survival of the business.
Why are commercial properties underinsured?
- The base replacement costs that were determined years ago were too low. The replacement cost may have been based on market/assessment value instead of replacement cost. The focus on accurate replacement costs has increased over the last few years but was less of a concern previously. Recent inflation updates have not been sufficient to increase the replacement costs to the correct value.
- If the policy has not been reviewed every year and updated, the property description may be years out of date. If the buildings have been updated and/or expanded but the replacement cost was not updated to reflect those updates, this means the costs do not provide coverage for the building(s) as they now exist.
- Construction costs have jumped over the last few years due to supply chain interruptions; higher material costs; and labor shortages which lead to higher labor costs. Applying an inflation guard helps but may not be sufficient depending upon the base cost, whether the data about the property is correct and the percentage added.
- Stresses on the economy and the businesses may encourage business owners to reduce costs and therefore the coverage amount. Owners may look at the premium cost but not the risk associated with underinsurance.
e2Value® offers an easy-to-use estimator that can accurately calculate replacement costs and actual cash value for virtually any commercial structure from smaller retail shops to larger, more complex facilities such as hospitals, warehouses, schools and manufacturing centers. As the leading provider of web-based property valuation solutions, e2Value can assist you with all of your Insurance-to-Value (ITV) and collateral value monitoring needs. Contact us for more information.