Property Properly Covered?

When working with real estate companies, one of the most common questions I get is ‘is our property properly covered?’.  In this discussion there can be many misunderstandings around what insurance companies call “insurable value” versus market value. Insurable value is referring to how much the insurance company is covering the building for in the event of a claim. Market value is how much the property is worth in the marketplace.

Market Value VS. Replacement Cost

Most insurance carriers give very little notice to the market value of a property. They are looking at much it would cost to rebuild the property in the event of a catastrophic claim. This is commonly referred to as replacement cost. This figure can be very different than market value depending on where the building is located since it solely depends on factors like square footage, the quality of materials used, and the features & finishes of the structure and not on the volatility of the real estate market. A building with a market value of $500,000 in one area could have a market value of $1,200,000 in another area. However, regardless of the area, the cost to rebuild  (and therefore the replacement cost of the buildings) would be the same.

Over the past few years, the industry has been seeing an increase in the estimations for replacement cost. This is driven by both higher labor costs as well as higher costs for materials. Buildings that could have been build three to five years ago for $150 a square foot could now cost upwards of $200 per square foot or more.

This brings up a couple of key questions:
  • When was the last time you assessed how much your building is covered for?
  • Does your policy contain a co-insurance clause?

If you have maintained the same level of coverage for the last several years without any updating, you may not have enough coverage in the event of a catastrophic loss. More concerning is if you have a co-insurance clause in your policy.

What is Co-insurance?

Co-insurance sets a percentage of how much coverage should be in place on your building. 80% co-insurance is the most common percentage used. If you have an 80% co-insurance clause and the building’s replacement cost is $1,000,000, that means you need to carry at least $800,000 of coverage on the building. If your replacement cost has increased, but you have not increased your coverage, you are at risk of getting your claim pay out significantly diminished. For example, if you have the coverage and coinsurance clause discussed above, but only had the building insured for $700,000 because you hadn’t adjusted for inflation in building material costs. If you were to have a loss totaling $300,000 after your deductible, you would only get $262,500 from the insurance carrier instead of the full $300,000 you would have gotten had you been insured to the proper valuation.

While no one ever wants a claim, they definitely do not want to have a claim pay out reduced due to lack of coverage. If you have questions about replacement costs and co-insurance and how it impacts your property, the team at Crum-Halsted Chicago is always ready to help.


by Greg Jones