Did you know that if your building is underinsured, your insurer might not cover all damages?
Unlike personal insurance carriers, commercial insurers do not have computer programs to determine the rebuilding cost of your building; this responsibility falls entirely on the insured.
Reporting the total rebuilding value of your building is the most crucial element to ensure an adequate settlement of an insurance claim in the event of a loss. In the event of a claim, you will need to justify that the declared value accurately represents the rebuilding cost.
To complicate matters, commercial insurers generally impose a coinsurance percentage, which can be 80%, 90%, or 100%. This means you must report at least 80% (or 90% or 100%) of the rebuilding cost. Therefore, the rebuilding value plays a major role in determining the adequacy of your coverage, making its determination crucial.
If the rebuilding value is underinsured, you will be penalized and will have to bear (self-insure) a portion of the loss. Additionally, if the rebuilding value is correct but you choose to insure only 80% of that value instead of 100%, you will have to self-insure the remaining 20% in the event of a total loss.
Each year, when determining the rebuilding value, consider the following:
- It is crucial to understand that the rebuilding cost is not the purchase price or market value.
- Only an appraisal can confirm the exact rebuilding value.
- The value should reflect the cost to rebuild from scratch to a new state, restoring the building to its pre-loss condition.
- Include all assets, such as:
- Are there other buildings on the premises? Such as a garage or shed.
- Fixed installations: Allocate in the calculation any element not included in the building’s value. Provide details and refer to the building description in the insurance policy (e.g., ventilation for a paint room, etc.).
- Fire protection systems: Sprinklers, other detection and fire systems including tanks, etc.
- Paving/sidewalk/pool/landscaping/fencing/lighting.
- Others: Solar panels, antennas, and other items (check if these assets are covered, as sometimes these items cannot be included).
- Include costs/fees, such as:
- Architect/professional fees: Costs for architects, engineers, and other professionals that may be needed during the rebuilding process.
- Demolition and debris removal fees: Costs for demolishing the remaining structure and clearing debris from the site.
- Legal requirements/current building codes: Costs necessary to meet current building standards and regulations, which may require updates or modifications from the original construction.
- Harmonized taxes: To be confirmed with your accountant (include if these taxes are not directly recoverable by the insured).
- If applicable, costs associated with preserving and restoring historical features according to regulations and standards set by preservation authorities. Costs for specialized skills and trades needed to reproduce historical details.
Unfortunately, over the years, we have found that many businesses are underinsured. Therefore, we strongly encourage obtaining a professional appraisal and updating it annually to declare 100% of their rebuilding value to avoid any self-insurance in the event of a total loss.
