Tips to Make Sure Your Commercial Property Coverage Doesn’t Fall Behind Actual Replacement Costs
By James Barr, Vice President
Like homeowners insurance, commercial property policies are feeling the impact of inflation, as costs continue to soar for everything from labor and materials to supplies and transportation. As we have been counseling our personal lines clients, it is important to review your commercial policy — even if it is not currently up for renewal — to make sure you are insured sufficiently based on today’s true replacement costs, should you incur a significant loss.
But unlike homeowners policies, which offer guaranteed replacement cost endorsements that insure the home for whatever it costs to replace the home at the time of the loss, commercial property policies do not offer similar endorsements.
However, there are some benefits that commercial property owners can realize that their personal lines counterparts cannot.
Strategic Plan Design to the Rescue
To illustrate the risk, consider a commercial building that you own and have insured for $500,000 — its replacement value. If that policy hasn’t been reviewed or updated recently, it’s likely that the true replacement costs are much higher than $500,000, based on today’s prices. If that building needs to be rebuilt following a significant loss, the policy would only cover the $500,000 limit — not the actual replacement cost.
That’s the bad news. But there is good news: While homeowners policies offer the additional assurance and insurance in the form of the guaranteed replacement cost endorsement, commercial property owners are the beneficiaries of far less stringent underwriting and appraisals on the buildings they need to insure.
Because there is far greater scrutiny placed on home values and the calculation of replacement costs, commercial property policyholders can work with their agents to calculate projected/updated replacement costs and even build more leeway into the insurance plan design.
Homeowners policies are fairly cut and dried, though there are measures to take to make sure inflation isn’t leaving gaps in your coverage. Commercial policies are written in a way that allows the insured to be much more innovative and strategic in the way they craft the limits and calculate replacement costs. You should be meeting with your agent to discuss tactics at your disposal to protect your assets from the worst-case scenario, especially now that inflation is making the worst-case even worse.
Three Steps to Take to Optimize Your Property Coverage
Before finding out that your commercial property insurance policy does not carry enough coverage to withstand the rising costs of inflation, take these simple steps to make sure your policies are optimally designed, given today’s new realities:
The first step is to meet with your agent to conduct a replacement cost analysis of your property or properties. Make sure your agent is using up-to-date replacement cost estimators (RCEs) that account for this rather sudden and sustained inflation. Knowing what it will truly cost today (or even into the future) is the first step in aligning your policy with actual replacement value. You and your agent should conduct a fresh analysis of your property, building materials, and today’s alternatives to older building materials and processes to leave nothing to chance.
Next, have your policy re-quoted by your existing insurance provider and at least two other carriers. Your agent should be able to recommend who these carriers might be and will work with the insurance companies to execute the required underwriting and premium quoting.
Finally, ask your agent to consult with you on strategic ways to get creative in the policy design. While your personal homeowners policy may be more limited in that regard, you should know all of the tools at your disposal. For example, a property owner that owns three commercial buildings, each valued at $1 million, might be interested in considering a “blanket” policy that covers all three buildings for a total of $3 million. In such an instance, if a total loss were to occur in one building, but the replacement cost were to exceed $1 million, that property would still be covered, up to the full $3 million for the entire policy.
Based on an inflationary environment that shows no signs of slowing down, we are urging our clients to err on the side of being over-insured, rather than run the risk of being under-insured. Though the premiums may be slightly higher for additional coverage, it’s often less than what most people expect.
And as some are finding out the hard way, it’s never a bad thing to have “too much” insurance when a catastrophe strikes.
If you would like a complimentary assessment of your current commercial property coverage to determine if there are any gaps between what your policy insures for and what the actual replacement costs are today, please "contact me at (586) 949-2300 and I will provide a no-cost evaluation of your policy" <jbarr [at] gcbinsurance [dot] com>.