What Insurance Coverage do you need and why

If you own an apartment house or other commercial building, be sure to check your insurance coverage with a fine-tooth comb, at least once a year, when the policy renews. This check becomes more important, particularly if you’ve owned the building for a long time, and downright vital if the building existed long before you bought it.

I see too many landlords and businessowners who either don’t do this at all, or resist making what could be crucial changes, if their property ever suffers a loss. Especially, a serious loss.

Make sure the building has enough insurance. Most policies require the building to be insured, for at least 80% of its rebuilding cost. In other words, if you lost the building, how much would the labor and materials cost to rebuild it? Not an easy question to ponder, downright frightful to imagine happening to you, but a really important question to answer. If you don’t have a clue as to your building’s rebuilding cost, ask your insurance agent or insurance company to assist you in making that determination. And remember, insurance deals just with the cost to rebuild a building, (bricks and mortar, if you will), not what it would sell for in the real estate market.

If your building is underinsured and something happens to it, there’s a chance, depending on the policy you have and are eligible for, that you won’t collect the full amount needed to repair or rebuild the building. This is not something you want to find out, after filing a claim with your insurance company.

Buildings in urban areas or with occupancies that make them ineligible for standard businessowner policies, are particularly vulnerable to coinsurance clauses that usually exist in the policies that cover these kinds of buildings. Coinsurance is designed not only to discourage policyholders from deliberately underinsuring, but penalizes them if they do – intentionally or not.

If it would cost $300,000 to rebuild your building, and your policy has an 80% coinsurance clause, you need to carry at least $240,000 of insurance coverage. This approach at least guarantees no penalty, when collecting for a partial loss. Naturally, the safest approach is to insure for the full $300,000. But if an owner decides to take their own risk, and only insures for half the rebuilding cost, then, on a $50,000 claim, only 5/8’s of the loss would be covered, or $31,200. So an insured is self insuring in the amount of $18,800, in this example. They insured for $150,000, when they should have insured for at least $240,000. So a fraction is multiplied by the amount of the loss – did (insure for) over should (have insured for).

I have a couple of clients who have chosen to leave themselves vulnerable, in manners similar to the example detailed above. I hope they never have a serious loss, and then have to cope with the obvious financial pain it would cause.