To say the past 18 months have been a seller’s market is an understatement when it comes to real estate habitational property.  As people left the cities, small apartments & condos for larger homes in the suburbs and countryside to accommodate the need for home office space, home schooling and outdoor recreation – investors quickly took notice to get in on the money game.

As many markets hit high market prices, building supplies hit all-time highs due to supply and demand and a rash of natural disasters hit the country – Real Estate Assessors, Banks and Insurance Companies scrambled to determine what the post spike market value really was and for insurance what the replacement cost should be.  It’s been a journey.

The Elephant in the Room:  Property Valuation for Commercial Habitational Real Estate

The perfect storm noted above has caught many insureds with inadequate property insurance coverage.  With replacement costs sometimes increasing over 30% within a 12-month period – or in between renewals of contracts – it’s no wonder the problem escalated during the real estate boom – especially in the habitational market.

The problem is Co-Insurance clauses and penalties.  

It’s simple math – but coinsurance clauses can be overwhelming and failure to plan for them can be a very expensive error. 

How it works:

Hypothetically let’s say:

  • An apartment building’s replacement value is $1 Million with a 90% coinsurance clause and $10K Deductible. This means to avoid a penalty on any claim paid, the building must be insured for at least $900,000.
  • Deciding a total loss is unlikely, the owner of the building decides to only insure the building for $800K instead of $1Million – again, the minimum to avoid a co-insurance penalty would be $900K. 
  • The building sprinklers went off causing $300K in water damages. 
  • The owner’s out of pocket cost is NOT just the 10K deductible but will be $43,300 due to the co-insurance penalty.

The co-insurance formula – here’s how it works

  • Property/building Limit divided by Insurance Required ($800,000/$900,000) is .889. 
  • Insurance carrier takes that ratio and multiplies it by the gross claim amount ($300,000 x .889)  
  • After the deductible the carrier will pay out only $256,700

Insurance policies can differ; it is important that you consult your own policy to determine the potential impact of co-insurance penalties, if any.

How to protect yourself

Watch the market and talk to your Insurance Broker and if you haven’t had a formal valuation/assessment on your property in the past 12 months, we strongly suggest you make that a priority.  The unthinkable happens and when it does, the financial hit to your bottom line could be catastrophic if your commercial property is underinsured.

At Power Risk Management we offer free consultations to review your current coverages.  Give us a call at one of our convenient locations:

Chicago Office: 5343 W. Devon Avenue, Chicago, Illinois 60646 | 773-273-8777
Joliet Office: 310 N Hammes Avenue, Suite 302D, Joliet, Illinois 60435 | 815-605-4722
Bourbonnais Office: 1410 Argyle Ln N, Bourbonnais, IL 60914 | 815-348-7452
Denver Office: 1400 16th Street, Suite 400, Denver, Colorado 80202 | 720-779-1190