While the market value of statewide commercial real estate has been on a virtual rollercoaster over the past several years, maintaining adequate replacement value insurance should be a constant regardless of the market heading up or sliding down Â… or for that matter whether you are working with a commercial insurance agent or are going the self-insured route.
Property owners often confuse market value and replacement cost and can’t understand why they would need to insure a building for more money than they could sell the property for, or for more than what they paid for the property. It is not unusual to find older properties with architectural etecual designs that would increase the replacement costs substantially. Old mill buildings are a prime example of properties that may sell for far less than thewhat it would cost to rebuild.
Spread the Risk
There are many ways that one can spread the risk. Insurance can be purchased to functionally replace a building. Consider the using the mill building example. It may be used as a warehouse facility and could be covered by a policy that guarantees “functional replacement cost.” Therefore, an old brick and timber structure could be replaced with a steel building. This emphasizess the importance of working with insurance professionals who are aware of the many options available based upon a company’sies needs, abilities and tolerance for risk.
Commercial property in general has experienced an increase in value in recent years, with a number of factors contributing to this surge. Lower interest rates, combined with a heightened demand for investments deemed “safer” than the volatile stock market has placed commercial investment property in the popular column.
Specific regions throughout Massachusetts are presently enjoying a commercial real estate boom. The western part of the state, for example, is quickly becoming a high- technology hub, while the Burlington area is currently considered one of the hottest rental markets.
This demand for both new and existing commercial real estate continues to remain strong for the time being, despite an increase in building costs that eventually may sway this up-swinging pendulum to the other side.
Core building costs, such as steel, wood and labor continue to rise. Throw the effect that ever-burgeoning gasoline prices have on transportation costs and it’s anybody’s guess how high ancillary building costs will go.
The uncertainty of the commercial real estate market’s future is one of the many compelling reasons why property should be insured to “replacement” value and not merely to “market” value.
Say, for example, that a business owner or investor who purchased a building 15 years ago loses the property to fire. If insured to market value, he/she would be covered for the amount of the expected price that the property should bring if placed in the open market for a reasonable period of time. But that extent of coverage doesn’t take into account repair or replacement costs at today’s prices. That building may have cost $500,000 to construct in 1991 cost terms, but today it would cost much more to replace. The bottom line is having the proper coverage in place to get the higher amount.
Stay Up to Date
To take it one step further, commercial property owners should consider having their buildings appraised every few years to be certain they are insured to the proper value.
Up-to-date appraisal is particularly vital when for those commercial property owners who are self-insured. Sometimes considered a cost-savings devise, self-insurance translates into a business assuming risks directly. While a business, therefore, saves on the cost of insurance premiums, any losses must be covered privately. That method of saving a few dollars might be feasible for small losses, but many businesses can’t possibly cover major loss expenses, let alone replacement costs of an entire building and its contents.
A business can reduce the cost of commercial insurance premiums by taking on a large deductible, but in the event of the need to make a claim, that high-deductible gamble may not pay off.
Perhaps a wiser way to save a few dollars is to have a comprehensive loss-prevention program in place. Important whether you are self-insured or have commercial insurance, a good loss-prevention program encompasses the installation of basics like burglar alarms, stair handrails and sprinkler systems.
Loss prevention programs are the cornerstone for businesses to avert accidents and manage claim costs, both fundamental elements in determining insurance premiums. By identifying hazards before they cause accidents or injuries and evaluating the potential for unsafe conditions, the commercial real estate owner can reduce costs across the board.
Ever-Changing Industry
Insurance agencies that provide risk management services can help to identify a business’s goals to manage and reduce risks and subsequently control costs. Claims advocacy is another value-added option that some agencies provide. By working closely with a business owner, the insurance carrier and claims administrator, an agency can help ensure that claims are being managed effectively, that alternatives are considered when appropriate and that improvements are made to keep a commercial property owner’s risk management program on track.
Risk management services to consider when entering into a relationship with an agency may include Third Party Administration selection and evaluation; review and analysis of cost loss runs; catastrophic claims management; and medical and litigation management.
In today’s business environment ever-changing insurance needs exist. In addition to traditional insurance products, an increasing number of commercial property owners are considering emerging insurance product lines, such as dividend programs, finite risk coverage, risk purchasing groups, and large deductible programs.
Educating an insurance agent about the specific risks associated with your business cannot be stressed enough. By making it clear to a knowledgeable agent precisely what you want an insurance program to do for you and comprehensively identifying all risk factors of your industry, you can better avoid problems associated with the changing landscape of your commercial enterprise.
Full protection of commercial property is not without its monetary costs, but without it, the price you may pay as the owner of commercial property might be more than your market can bear.
