Most real estate investors know the importance of purchasing insurance for their commercial property. The common risks they protect against are liability for slip and fall incidents and damage caused by fire or other hazards. However, there are other key factors to consider when shopping for and reviewing insurance policies for your commercial real estate investment.
A. Proper Valuation- Often investors end up paying more on premiums because their policies insure the property up to the resell value rather than replacement value. The replacement value is the cost to repair or replace the property at the time of the loss by using like kind and quality materials. It is not the market value of the property. In determining the replacement value of your property, industry standards are used such as construction class, square footage, year built etc… Be sure to insure your property to its proper replacement value. Insurance companies will never give you more to repair or replace the property than the replacement value at the time of a loss, so it doesn’t make sense to insure to an inflated market value.
B. Flood Insurance- If your property is in New York City, insuring it against flood damage may not be at the forefront of your mind. However, with the numerous water main breaks throughout the City in the past five years, insuring against flood damage is key to protecting your investment. Remember, a flood can be caused by sources other than coastal waters and rivers. Water main breaks are more common than you might think, and the cost to repair or replace damaged floors, walls and carpets, as well as the cost of mold remediation, can be quite expensive. Flood coverage is not always automatically included. Be sure to ask your broker to include this important protection on your investment property.
C. Coverage Form- When reviewing your insurance policy make certain that the policy is written to insure your property on a “replacement cost basis.” Replacement Cost coverage means that your property will be replaced without a deduction for depreciation at the time of the loss. Also, be sure that your policy is written on a “Special” form basis, thereby providing the broadest coverage available.
D. Co-insurance-a term often misunderstood in the insurance world. It refers to a penalty you will incur if your property is NOT insured to the proper limits or within a reasonable valuation. For example, if the proper replacement value of your building is $1,000,000, and you have a 100% Co insurance clause, you would need to insure to 100% of that value, or you might incur a penalty at the time of loss. The greater the underinsured limit you carry the greater the penalty will be assessed at the time of loss. Essentially, to the extent that you are underinsured, you become a “co insurer” of the property. Discuss eliminating coinsurance entirely on your policies. Discuss these matters with a competent, licensed insurance broker to avoid confusion at the time of a loss.
E. Business Income & Extra Expense Coverage- although most investors do protect against the risk of loss of business income when the property suffers damage, it is important to consider loss of rent and extra expense coverage. Be sure to discuss adequate loss of rents coverage and know that, in the event of a loss, you will likely incur many unexpected “extra expenses.” Be sure to discuss proper loss of rents and extra expense coverage with your broker. At the time of a loss, this could be the difference between coping with a loss, and losing your investment.
No matter what your current insurance policy, it is beneficial to have it reviewed by an insurance professional to make sure you are not overpaying and you are protecting your investment.
[Data Source: Interview with Panel Expert: Brendan Leavy, a veteran in the commercial insurance industry].
