We’ve all seen news reports about the increased costs of, well, everything. With building materials and labor costs rapidly on the rise, you might find yourself in a lurch if your insurance limits (the most that will be paid by the insurance company) haven’t been adjusted.
It’s important to make sure your commercial property insurance policy is up to snuff with today’s sudden shift in inflation and the supply chain. So, we’re breaking down the areas that need your attention sooner, rather than later.
What’s the big deal with insurance limits?
Most commercial insurance policies are written on a “replacement cost” basis. This requires you to carry a limit of insurance that would be adequate to reconstruct or replace damaged property with the same kind and quality. Meaning it would be enough funds to repair or rebuild the same building, in the same location, of the same size and quality.
In the event of a covered property loss (whether it’s a partial or total loss), if the building limit in your coverage is too low to cover the total costs, you may be assessed a penalty. In other words, if your insurance limit is insufficient to cover the expenses of rebuilding, you will personally have to pay the difference in price.
When the coverage limit and actual damages don’t match, then a settlement claim will need to be determined by the insurance company. Typically, the claim settlement amount is a ratio of the amount of coverage you had compared to the amount of coverage you should’ve had.
Which insurance limits should I review?
Now that we’ve addressed what’s at stake with insufficient insurance limits, let’s share some steps you can take immediately. While we always recommend a full annual review of your insurance program, there are a few areas of your property coverage that you should soon take a look at:
1. Building Reconstruction Limits: Some insurance companies are recommending that building insurance limits be increased 15-30 percent to cover the costs of rising inflation – but, that’s assuming your limit was adequate to begin with. This is why it’s important to frequently check your insurance coverage to ensure it’s staying up to date with current trends and prices. If not, you might find yourself with a significant out-of-pocket loss.
Most insurance organizations have tools available to determine the estimated reconstruction costs of a building. However, these tools are limited as there is only so much information they can access. Additionally, most insurance agents aren’t trained in building appraisal or construction. Your best bet to determine a reasonable and accurate estimate of costs is to have an official appraisal company perform a reconstruction evaluation.
While a professional appraisal will be the most accurate way to determine your replacement cost, it’s important to remember that they’re just estimates. Many times, they can’t keep up with the pace of rapid inflation rates and can still fall short of the true costs.
2. Building Contents Limits: Similarly, you should also check your insurance limits on building contents. Supply chain and inflation issues are making it difficult to find and purchase business materials and property, especially in a timely manner. Moreover, the costs of supplies from office furniture to specialized equipment have significantly increased.
The stress of waiting for the materials and equipment you need to continue your operations is more than enough – don’t add to it by being on the hook for a higher replacement cost than expected in the event of a claim.
3. Limits on Lost Revenues: Speaking of labor and supply delays, it’s also important to check your Business Income and Extra Expense (BIEE) coverage. BIEE coverage is utilized when a covered property loss causes operations of a business to temporarily shut down. For example, if you’re a manufacturer that uses specialized equipment or machinery, it could take months for replacement equipment to arrive, shutting down your operations as you wait for what could be years. BIEE would pay for this loss of business income and the extra expenses you may incur to keep your operations going.
In the past, you might’ve been able to reconstruct and repair your building and replace your equipment within a matter of months. Now, it may take up to 18 months or even longer. BIEE coverage is written with either a dollar limit or a time limit. Both the dollar limit and time limit on your BIEE need to be substantial enough to sustain your business until you are back in operation.
What does this mean for you?
Now is not the time to fall asleep on these critical areas of your insurance coverage. Property insurance can be written to accommodate a number of different circumstances. Once again, if your limits are currently set too low, costs will not be completely covered. Work with your insurance advisor to make sure you aren’t woefully underinsured in our new inflated economy.
This content is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. Gregory & Appel is neither a law firm nor a tax advisor; information in all Gregory & Appel materials is meant to be informational and does not constitute legal or tax advice.