Posted by: David J. Hutchison, President / Spiris, Inc.

Property Insurance—and Proper Insurance Valuation

“Sixty percent of non-residential property is under-insured in North America, some by as much as 40 percent or more.”
—Lewin, Wright & Company Inc. (property appraisal specialists)

Might you be one of those properties?

The best Commercial Property insurance coverage is of little use if the values are insufficient to accomplish its goal of adequately repairing, rebuilding and/or replacing your buildings and contents following a covered loss. Yet, as Lewin points out, far too many businesses will be in for a rude awakening at the very time they can least afford an unpleasant “inadequate insurance” surprise: the day of the claim.

Why might so many of these properties be underinsured today, and possibly in even more peril tomorrow? Especially in this economy, when real estate values have been going down, not up, in nearly all geographic areas?

Two quick answers.

First, about those real estate values. While the price at which a willing buyer will take your property off your hands is a terrific measure of your asset’s value, it’s a lousy measure of actual construction costs. And it is those construction costs that your insurance must pay to repair or rebuild after a loss.

While a given location or usage of a building can significantly impact real estate value, construction costs are based upon materials and labor. The same building’s real estate value can vary significantly by location even within the same city, while Construction Costs may be identical. And here’s the irony of the current economy: While real estate valuations have sometimes dropped dramatically, construction material costs may have increased dramatically!

Secondly, especially in this economy, never overlook inflation. As the government works its way through current issues, experts figure that materials costs, due to both increasing worldwide demand and the sliding value of the U.S. dollar, will keep rising for years into the future.

Given just those two factors, does it really make sense to continue to trust your valuable protection to values that may be far out of date? And what good are automatic annual increase clauses that are either based upon those same out-of-date values or use what may well be a far too inadequate percentage, such as 3%?

At Spiris , we believe great client service includes:

• First, reviewing your current property replacement values to either confirm or make the necessary changes required to bring them into line with realistic valuations.
• Next, we will work with you to review and update those values at least annually.

Don’t let your valued property protection become a sad statistic. Contact Spiris today.