Defusing a Property Insurance Policy Landmine
image source: http://www.thornesmarketplace.com
Part of the charm of the Pioneer Valley for me is the area’s mix of history and modern conveniences. Walking through the downtown areas of Springfield, Northampton or Greenfield, you can almost see the horse drawn carriages going by coffee shops that now offer high speed WiFi.
Several of our clients have taken advantage of this juxtaposition as they have located their businesses in buildings constructed in another era. The beauty of historic buildings can make an enjoyable office or retail setting.
For example, our new client ConVino is located in Thorne’s Marketplace at 150 Main Street in Northampton. That building was originally constructed in 1873 for McCallum’s Dry Goods, and then expanded twice in the 1920s to become McCallum’s Department Store.
The risk to insuring a building like this is that there can be discrepancies between the building’s market value and its replacement cost. (This can be true of any building, but with historic buildings the risk is higher.)
A building that may have a market value of $500,000 might cost much more to repair or to rebuild because of intricate woodwork or fancy tiles or other details. Older buildings may also necessitate bringing electrical and plumbing systems up to code.
In my experience, you don’t really know what the building’s true value is until you have to repair it.
This is the challenge that our commercial insurance team faces.
Naturally our clients want to keep premiums low and not over insure their property for more than their purchase cost. Insurance companies on the other hand know that repair costs are somewhat unpredictable, so they want realistic coverage. They try to protect themselves further with a co-insurance clause in the fine print of your property policy.
The co-insurance clause stipulates that if you have underinsured the value of your property, then in the event of a claim, the insurance company will split the repair cost with you in a manner that is proportional to the value that you did insure.
For example, let’s say that you own a building worth $1 million, but you purchased it in a depressed real estate market for $500,000. So you insure the property for $500,000.
Then you have a small fire that causes $100,000 of damage.
Under the co-insurance clause, your insurance company would say that your building should have been insured for $1 million but you only insured it for half of the value. By default, you have self-insured the other half. Instead of arguing over whose half burned, they would split the loss. Per their co-insurance clause, they would offer you $50,000 toward the damage, splitting the repair cost in half.
This could be shocking to the client who thought that they were covered up to the full amount of the loss.
At Webber & Grinnell, our operating procedure is to request that the insurance company remove the co-insurance clause from their property policy. If they feel the property policy is reasonably valued, most insurance companies will honor our request. Not all, but most.
Without the co-insurance clause, you would receive $100,000 – full payment – for the repairs in the hypothetical scenario I presented above.
Now you know why an accurate assessment is key to good insurance coverage for your business property. And you also know that we read the fine print and go to bat for our clients!
Please call or email if you have any questions about the co-insurance clause or about your property policy in general.