Many articles have been written about underinsurance in the residential market, but issues of underinsurance in the commercial market are less often discussed.
There are multiple reasons to establish proper Insurance-to-Value for each risk, as well as across the carrier’s entire book. It is as important — if not more so — for commercial insurance as it is for residential property insurance. Most commercial properties are used to generate income, either by leasing the space out or by activities in the space. Unlike many residences, few commercial property owners want older buildings rebuilt back. They want clean, easily leasable space with all modern facilities, connections, infrastructure and energy codes. Also, the facade may have to match the surrounding structures, but still have modern materials behind it.
An accurate ITV is important to the insured so that they can rebuild quickly and focus their attention back on their business as they did prior to the loss. Since the purpose of insurance is to make the policyholder whole again after an event, underinsurance may undermine confidence in the product, broker, carrier and/or industry. Beyond that, underinsurance also affects the underwriter, carrier and reinsurance. Underinsurance can result in an incorrect loss ratio, underestimated risk exposure and insufficient coverage, which might result in the carrier not covering some losses. Claims could be settled more easily and quickly if proper ITV is set. Premiums can be set appropriately with correct ITV.
The article, Avoiding Underinsurance – Why an Accurate Sum Insured Is Vital (but Often Neglected), covers the basic principles of calculating sums insured, and issues related to underinsurance for the insured, brokers, underwriters and carriers. This is an in-depth article on the subject, mainly focusing on commercial policies. It includes an underwriter checklist also. According to this article—and many other sources—underinsurance is estimated at around 60% of the actual replacement value in the US.
Some of the topics to cover in order to properly value properties are:
For new structures there are cases where the rebuilding costs may be higher:
- Were there discounts or incentives available for the initial build that may not be available for a replacement?
- In a claims situation the structure needs to be built back quickly with an available qualified builder. Commercial projects are often extensively planned and budgeted, but with an abrupt halt to a business, the process is sped up. Since it’s more important to get the business back on line, this leads to higher construction costs.
- Inflation since the building was bid may have increased the replacement cost.
For all structures:
- Replacement cost is not the same value as market value.
- Revised building codes may require additional costs.
- The availability of builders capable of rebuilding that specific building at the time it needs to be rebuilt may affect the replacement cost.
- The cost and availability of building materials necessary for that structure may change over time.
- Cost of equipment.
- Cost and availability of labor, especially if specialized trades are needed.
- The skill sets and/or materials needed to restore historical buildings may not be readily available, which can increase their costs.
- Specialized facilities’ costs may be difficult to determine.
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.