Is Your Commercial Property Insurance Outdated?

Ensuring your commercial property insurance reflects current replacement costs is essential to protecting your investment. Outdated valuations can lead to reduced claim payouts due to certain policy provisions.

Here’s what you need to know:

Understanding Coinsurance Clauses

Coinsurance clauses in commercial property insurance require you to insure your property to a specified percentage of its replacement value, typically 80%, 90%, or 100%. If your property’s insured value falls below this threshold, your insurer may reduce claim payments accordingly.

Given recent increases in construction costs due to inflation, many property owners may unknowingly be underinsured.

Calculating Coinsurance and the Importance of Up-to-Date Valuations

Consider this scenario: Your property’s current replacement cost is $1,000,000, but your policy provides a coverage limit of $600,000. With an 80% coinsurance requirement, you should be insured for at least $800,000, leaving you underinsured and subject to a coinsurance penalty.

In the event of a $400,000 loss, the insurer might only pay $300,000 (75% of the loss), minus the deductible, due to the undervaluation. This discrepancy could leave you with significant out-of-pocket expenses.

Conducting a Replacement Cost Analysis

Insurance brokers often use up to date third-party tools, such as Marshall & Swift, to provide guidance on replacement cost valuation. These tools consider factors like location, construction type, square footage, and additional details of your property to offer accurate valuations.

Regularly updating these valuations ensures your coverage aligns with current construction costs, helping you avoid potential penalties.

Be Aware of Margin Clauses

When is replacement cost, not replacement cost?  Some policies include margin clauses, which limit the amount you can recover for a loss at a specific location to a percentage of the reported value. For instance, with a 120% margin clause, if a building is insured for $2,000,000, the maximum payout would be $2,400,000.

However, if your valuation is outdated, this cap may not cover the actual replacement cost, leading to further financial shortfalls.

Protecting Your Investment

To safeguard your assets, it’s crucial to annually review and update your property’s replacement cost valuations. Engage with your insurance broker to understand your policy’s specific provisions, such as coinsurance and margin clauses, and adjust your coverage as needed.

Proactive management of your insurance coverage ensures you have the necessary resources to recover from unforeseen events and maintain your financial stability.

By staying informed and regularly updating your property valuations, you can avoid unexpected expenses and ensure your commercial property insurance provides adequate protection.

Learn more about commercial property insurance coverage and how to protect your business.

Contact Risk Strategies ICNJ today!

Email us at info@icnj.com for guidance on commercial property insurance and ensuring your valuations are up to date.