As we adjust to the “new normal” of steadily increasing property insurance rates, including higher deductibles, the next phase of coverage tightening could be the reintroduction of coinsurance provisions, or the more common “margin clause” in lieu of blanket coverage limits. These clauses can impact your replacement cost when navigating property damage or loss, potentially resulting in unexpected out-of-pocket expenses, but a replacement cost appraisal can help reduce your risk.
Know Your Cost
A margin clause is a maximum payment an insurer will make for a property loss. This can range from 110% to as much as 150% depending on the insurer and your broker’s ability to negotiate favorable terms. Essentially, if you insure a building for $1,000,000, the maximum payment an insurer will make is $1,100,000 (110%) or $1,500,000 (150%). Pretty simple, right?
Replacement cost is commonly referred to as a replacement with like-kind and quality. But the cost of replacing a building that is destroyed by fire is often less than if destroyed by a catastrophic event such as a windstorm due to supplies and labor being in high demand. It can be confusing to know what to expect for the replacement cost of your property. Premiums are based on a rate per $100 of value, so a higher value equals higher premiums. The insurer will ask for a signature on the statement of values attesting that the values are accurate. Insuring limits that are artificially low is unacceptable and will result in not only higher rates, but possibly an underinsured loss.
Replacement cost appraisals are an important part of a risk management strategy. Simply increasing a value 3% to 4% per year may have been acceptable during a soft property insurance market when rates were low and blanket coverage with no coinsurance was the norm.
But in today’s market, accurate information is key.
Not only will values be accurate, but this additional step will also provide building details that underwriters appreciate and can help set your risk apart from other prospects they are considering. The cost of an appraisal can be as low as $500 per building, depending on volume and the complexity of the structure.
Property replacement cost appraisals can increase your values and resulting premium but knowing you’re mitigating the risk of a significant underinsured loss is worth it, especially when the risk could be exponentially higher than the premium increase and appraisal investment. Considering replacement cost is a crucial step in designing your risk transfer program.
Support for Your Strategy
Replacement cost appraisals are just one part of a comprehensive risk management strategy. Our experts at Charlesworth Consulting understand the unique risks in your industry and can provide the insights you need to ensure your business is protected. Ready to learn more? Contact us today and let’s get started!