Francine Robinson, CIP, RIBO

How to Choose the Right Amount of Coverage for Your Commercial Building

In the event of a loss, would the coverage amount for your commercial building be enough to cover all the costs incurred? This is a crucial question to ask before renewing or taking out an insurance policy. To assist you, here are 10 things to check when deciding on the right amount of coverage.

1. Have your building appraised.

This is the first and most important step. A professional appraiser will base their appraisal on:

  • the depreciated cost (actual cash value)
  • the replacement cost
  • and/or the market value

These are three different amounts. Generally, the insurer’s payout is based on the depreciated cost or the replacement cost.

It’s important for your appraiser to take this into account and include the insurer’s compensation amount in their report – this does not necessarily involve additional fees. This appraisal will be your starting point.  You can also submit it to your insurer as proof of loss if you need to file a claim.

All other considerations will be in addition to your underlying limit.

2. Factor in demolition expenses following a loss.

This is an important element to consider. The reason is simple: it’s much more expensive to demolish a steel structure than it is to demolish a wood-frame one. Does your current policy provide the right amount of coverage?

3. Consider taxes paid on construction or repair costs.

Do you recover taxes? This question is worth asking, since this additional amount may be taken into consideration when calculating the insurable value of your commercial building.

  • You recover taxes: don’t include them in the coverage amount, since they will be excluded from the compensation you receive.
  • You don’t recover taxes: include them in your coverage amount.

When in doubt, your tax advisor or accountant can confirm this for you.

4. Consider your detached private structures.

In addition to your main building, you may have detached private structures or other separate buildings such as:

  • Outbuildings
  • Loading docks
  • Fences
  • Electric fences
  • Parking lots
  • Gas tanks
  • Etc.

If you take the time to list them all, you’ll see that there may be a significant number of detached private structures. It’s important to take them into consideration when calculating your replacement value.

5. Check the definition of “building.”

Each insurance policy has its own definition of “building.” Take the time to read it over. Often, the professional appraisal only takes the value of the base building into account. You will therefore need to calculate an additional amount for fixtures that are specific to your building or operations.

These include dust collectors, additional ventilation, electrical panels for your operations, fire protection systems, anti-theft systems, communication systems, etc.

Keep in mind that if these pieces of equipment are tenant improvements and betterments, you will need to come to an agreement with the insurer. Will this equipment be calculated as part of the building or its contents? Often, the company that incurred the expense may see it differently. To avoid being over- or underinsured, make sure to ask the right questions.

6. Check your policy limits and restrictions.

This step is crucial, since policy limits and restrictions vary widely from one insurer to another. In the event of a claim, you don’t want to end up paying out of pocket because of a limit you weren’t aware of. Take debris removal, for example: a limit of $50,000 may not be enough, depending on the value of your building. Your broker can help you decide which amount is best.

7. Check and consider statutory conditions.

You also need to estimate the necessary increase in repair and replacement costs to comply with a statutory condition regulating zoning or the demolition, repair or construction of the building after a loss.

What would you do if the municipality prohibited you from rebuilding on the same foundation? What if you had to demolish a large undamaged section of your building to ensure it respected a mandatory distance on the property? Although you may be covered, the limit being offered may not be enough. Check with your broker to find out.

8. Is your building a heritage building?

If your building has been designated as a heritage property in accordance with a municipal by-law or provincial legislation, you’ll need to consider how this will affect the amount of coverage you’ll need.

9. Calculate based on the coinsurance clause.

Your building insurance policy will typically include a coinsurance clause. In simple terms, the insurer is only required to pay a portion of the loss based on the ratio between the amount of insurance carried and the actual value of the insured property.

If the insured fails to take out the required coverage, they will have to absorb part of the loss themselves. This amount is proportional to the degree to which their property is underinsured. If you don’t want to insure to 100% of the building’s value, you should at least meet the coinsurance requirement, if applicable.

10. Review your limit each year.

Don’t forget to review your limit on a yearly basis or after significant changes, such as an increase in construction, labour or supply costs.  

Although your policy specifies coverage for the insurable risk, each insurer may extend this coverage differently. It’s important to understand the impact of these clauses when establishing the insurable value of your building with the insurer. That way, you can rest easy.    

You may have heard the expression “comparing apples to apples,” but it’s easy to go wrong by only comparing premiums based on the amount and type of coverage. Knowing how this coverage works in practice will help you choose the right coverage amount to avoid being underinsured if something happens, and may even save you money.

Here at Lareau, we have checklists, risk management tools and expert brokers who can help you determine the right amount of coverage. Contact us now.

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Francine Robinson, CIP, RIBO Damage Insurance Broker See the profile

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