Property Insurance: Building a Policy For Your Risks
Whether you're a property owner, manager or developer, one of the most significant risk management priorities will always be to protect your primary asset – your property. Property insurance, property risks, and the questions surrounding coverages are vital topics to be educated on to ensure your income stream's viability.
Several risks could result in partial or total loss. Fire and weather-related damages are the two most significant risk factors all property owners must consider when insuring their assets. In 2019, fire departments responded to a fire call every 24 seconds, according to NFPA, with losses exceeding $12 billion per year. Weather-related losses nearly double this figure with over $23 billion in damages per-year on average. As we continue to see an increase in the frequency and severity of damaging weather-related events, the need for a proper property insurance plan is further amplified.
How Rates Are Calculated
It is important to remember that most losses are not total losses when it comes to property damage. A building is much more likely to have costly damages to things like a roof or outside equipment due to a hail storm rather than a total loss due to a building burning to the ground in a fire.
Property insurance premiums are one of the most responsive coverages to deductibles and self-insured retentions. One of the most significant considerations when procuring cost-effective property insurance is retaining the frequency losses to the best extent you can and insuring only for catastrophic loss. However, rate breaks are not substantial until the deductible reaches $25,000.
When assessing property rates, it all starts with the COPE information.
- Construction type – frame, joisted masonry, light noncombustible, masonry, masonry noncombustible, modified fire-resistive, fire-resistive.
- Occupancy – an office or retail building will have lower rates than a manufacturing plant. Coverage for multifamily habitational exposures can require creative alternatives.
- Protection – alarms, sprinklers, distance to hydrants, fire stations, community protection class (1-10) all affect property rates; buildings in communities with excellent fire protection typically cost less to insure than facilities with limited fire protection.
- Exposure to risks from surrounding property, including distance and operations, impact acceptability and rates.
Loss history is another factor that will drive underwriting acceptability, terms and conditions, and pricing. Losses due to weather are typically considered acts of God. Therefore, they have a lesser effect on pricing than something like losses caused by tenants. The mix of occupancies in a property schedule is also an important factor. While underwriters are less enthusiastic about habitational exposures, some level of habitational in a schedule can be offset by the inclusion of desirable commercial properties.
For those with an extensive, geographically dispersed schedule, a loss limit on the policy can save premium dollars. The loss limit sets a maximum payout by the insurance carrier for a single loss on a large property schedule. Property insurance limits are typically triggered by a single event. A massive storm or earthquake can be considered a single event, so it is important to be conscious of their spread of risk. If coverage is placed into a program that combines the exposures of unrelated insureds under a single loss limit, your broker should evaluate whether a single event could cause losses over the loss limit.
A commercial property insurance policy is defined as coverage that insures against damages to buildings and its contents due to covered causes of loss. This policy may also cover loss of income or increase in expenses that result from the property damage. Commercial property policies may be written on standard or nonstandard forms.
As brokers, there are several factors and considerations we can leverage when constructing your property policy to ensure the best possible coverage. These include:
- Valuation --
- Replacement cost coverage replaces damaged property with like kind and quality, usually, using new materials and furnishings.
- Actual cash value reduces the replacement cost with a deduction for depreciation.
- Functional replacement cost allows for the replacement of an older building with a new one that provides the same functionality.
- Agreed amount valuation allows you to come to an agreement with the underwriter on the proper limit.
- Coinsurance - Allows limits at less than full replacement cost, reflecting the low probability of a total loss. Usually, underwriters require a minimum percentage of total value (typically 80 percent) to avoid a coinsurance penalty. It is important to note that failure to meet the coinsurance requirement will result in less than full payment of partial losses.
- Business income/extra expense – Offers protection from the interruption of income stream and provides funds for additional costs incurred in keeping the business going during recovery from a loss. Payroll can usually be included when specifically purchased, allowing the retention of valuable employees.
- Equipment breakdown – Sometimes referred to as boiler and machinery coverage, provides protection against equipment being damaged by perils not included in the standard property limit, such as electrical arcing.
Additionally, a typical property insurance policy includes several coverages subject to sub-limits. For many Real Estate companies, these sub-limits may be inadequate. We review those sub-limits individually to ensure adequate coverage.
In any industry, it is imperative to protect your most valuable assets. Talk to your RCM&D advisor today with any questions regarding property insurance coverage.