Property insurance provides protection against most risks to property, such as fire, theft and some weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, or boiler & machinery insurance.
Property is insured in two main ways – All Perils and Named Perils. All Perils cover all the causes of loss not specifically excluded in the policy. Common exclusions on all peril policies include damage resulting from earthquakes, floods, nuclear incidents, acts of terrorism and war. Named perils require the actual cause of loss to be listed in the policy for insurance to be provided. The more common named perils include such damage causing events as fire, lightning, explosion and theft.
When you purchase insurance on a Commercial Building or Rental Property, one of the most important steps is to determine the correct amount of insurance. Most Insurance Policies are designed to settle claims for your buildings, as well as your contents, on an Actual Cash Value basis, and if it would be your intent to replace the building, the policy must be converted to a Replacement Cost format.
There is no real definition of ACTUAL CASH VALUE, but it is considered to be the cost to repair or replace the damaged property less an allowance for depreciation, wear and tear, obsolescence, and other similar factors. Thus, on a partial or total loss, the amount collectible on your claims could vary considerably with the actual cost of repair or reconstruction, or replacement.
When the REPLACEMENT COST ENDORSEMENT is applied to some or all of your property, the endorsement alters the manner in which your losses are settled. Losses will be reimbursed to the Full Replacement Value using materials of like, kind and quality without deduction for depreciation.
The limit of Insurance placed must be equal to the estimated replacement value of the property. The best method to ensure adequate insurance is to obtain an independent appraisal. The Replacement Cost Endorsement, itself, costs nothing. Your costs incurred in insuring on a Replacement Cost basis, are in ensuring that your insurance values reflect the replacement value of your building, not the market value of the building, or the actual cash value.
Co-Insurance is a term recognized by many and understood by few. The clause exists in all insurance policies and works with your Replacement Cost Cover or your Actual Cash Value Cover, and can affect your claims settlements in a very dramatic way. When you purchase insurance on a building, insurance companies will expect that you insure the entire building, for its true complete value. In fact, when premiums are determined for the risk, insurance companies may not expect to lose the entire building and premiums and rates reflect this, but all premiums and rates are based on the premise that the amount of insurance carried equals the value of the complete building. The co-insurance clause is the insurance company’s protection that if you have not insured the “complete” building, you will become a co-insurer. It prevents you from deliberately underinsuring because you feel you could never suffer a total loss.
You are required to carry insurance equal to specified percentage of the value of your property, usually eighty percent. If you do not, your losses are reduced proportionately by the percentage you are underinsured. For example, let’s assume that a building you own has a replacement value of $100,000. You purchase insurance for $60,000 and the policy contains an 80% co-insurance clause. Sometime later you suffer a fire causing $10,000 damage to the roof and upper floor.
The co-insurance clause in your policy says that your insurance must have been equal to at least 80% of the $100,000 replacement value at all times, and you have violated this clause by carrying only $60,000. You become a co-insurer under the policy and your claim would be settled like this:
What did you carry? – $60,000 divided by what you should have carried! – $80,000 Multiplied by your loss of $10,000 = $7,500.00 As your insurance was 25% less than it ought to have been, you become a co-insurer of 25% of your losses. The co-insurance clause works equally with the Replacement Cost Cover and with the Actual Cash Value cover.
You can avoid becoming a co-insurer by doing the following: Make sure that the amount of insurance and the type of clauses in the policy match. In other words, don’t permit a replacement cost endorsement to be in your policy if your insurance values are equal to the actual cash value of the property. We can help! With the use of the Marshall & Swift Commercial Building Cost Evaluator computer program we can help you determine the cost to rebuild your building and ensure adequate limits of coverage .
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