Return on Insurance
Oct 1, 2007 12:00 PM, By Jennifer Popovec
That means many Midwest property owners will not be able to renew their existing policies and will have a harder time finding coverage, says Russell Longcore, an executive general adjuster and author of Insurance Claim Secrets Revealed. He adds, those who can find insurance will pay more for it, and policies will have more exclusions and require higher deductibles before coverage kicks in.
The bottom line for property owners is they can expect to see this fixed operating expense increase and have to address whether they can absorb it or if they have to pass the additional costs on to their tenants.
Hedging on the investment
In the Midwest, floods and tornadoes are the most common weather-related disasters. But, earthquakes should also be on property owners' coverage lists. One of the largest fault lines in the U.S., the New Madrid Fault Line, stretches across much of the Midwest, crisscrossing the Mississippi River in three places. The seismic zone has the potential to impact Indiana, Illinois, Kentucky, Missouri and Ohio.
Tornado damage is covered in most policies because it's considered wind damage — but some insurance companies have excluded wind damage because of the losses incurred in coastal areas. On the other hand, floods and earthquakes are excluded from almost all commercial property policies, says Judy Spry, a partner in BDO Seidman LLP's litigation and forensic investigation group in Chicago. Property owners can assume that they're not covered from losses related to flooding and earthquakes unless they've specifically requested it.
In most cases, flood insurance is only considered when a property sits in a flood zone and has a mortgage on it, says Barbara Munch, assistant vice president of corporate insurance and risk management for KeyBank. Even then, the $500,000 coverage lenders require is nominal.
But, as Hurricane Katrina illustrated, buildings that aren't in a flood plain can still be flooded. The National Flood Insurance Program estimates that more than one quarter of claims are paid on properties not located in a designated flood area. In addition to natural disasters, flood insurance encompasses destruction resulting from water main breaks. One flood recently swept through downtown Cleveland.
Experts advise commercial property owners talk with their insurance agents and/or insurance company to get quotes for both flood and earthquake coverage. “If you can buy it, you should,” Longcore says. “Even if you think it won't happen to you, it could happen to you.”
Midwest property owners should also consider safeguarding themselves with business interruption and business expense coverage. Many retail leases, for example, have provisions that allow retailers to stop paying rent if the shopping center is inoperable due to flooding or some other kind of disaster. In these situations, when the owner's income is in jeopardy, Levin says having the appropriate insurance will cover the loss of income. In addition, owners can get insurance to cover themselves if a retail tenant moves out and they can't lease the space after the property is repaired.
Value appraisal
Securing adequate coverage to address disasters is just one side of the coin — getting the appropriate amount of coverage is the other, says Longcore. Owners must make sure their property is “insured to value.” Insurance companies can penalize owners if their properties aren't insured to value, which means that each property needs to be appraised every two years so the policy can be updated to reflect the current market value and its replacement cost.
If a building is worth $1 million when a policy is written, for example, most insurance companies require $800,000 in coverage. However, if the building's value has increased and it's worth $1.4 million at the time a claim is filed, the insurance company will charge a hefty penalty for not having the building insured to value. Penalties levied can run well into six figures.
Additionally, owners should make sure they have a replacement cost value policy (RCV) instead of actual cash value (ACV), which will cover only the depreciated amount of the property.
