Apartment Building Insurance — Are You Properly Covered?

PROPERTY VALUATION

 

How are building values determined? Most times a "Marshall & Swift" Commercial Building Valuation Report, or similar property valuation company report, will provide an estimate of the building value. Building value for insurance purposes will either be replacement cost or actual cash value (replacement cost less depreciation). Market value, property taxable value or purchase price are not a factor in this equation. When a loss occurs, most property wwners expect to be paid the replacement value or cost of repairs without any deduction for depreciation, thus, the need to purchase replacement cost coverage. The con is that the insurance company will require that the building be insured for its replacement value, thus, normally a higher premium.

On the other hand, if you are in an area of the state where premium rates are too high or your rental Income does not allow the affordability of a higher premium, you may be want to consider an Actual Cash Value policy. This type policy will pay for the depreciated value of the property or its repairs at the time of a loss. The advantage is that you will insure a lesser value, let's say $1 million building that is 50 years old, for around half of that value, thus a much lower premium. The con is that if there is lender, they may require you to buy Replacement Cost coverage. Many Property Owners keep renewing their policies from year to year, unaware of the Replacement Value of their properties.

Recommendation: Order a Commercial Building Valuation Report for your properties.

Tip: Order from your Agent or obtain at no-cost from a competing Agent that wants your business.

 

POLICY FORM

 

You will either buy Special Perils or Basic Perils. Special Perils covering All Perils except those excluded (Best Policy). Basic Perils covered a limited number of perils, such as Fire, Lightning, Smoke, Windstorm, Hail, Explosion, Riot, Vandalism, Sprinkler Leakage, Sinkhole Collapse and Damage by Vehicles and Airplanes. Sometimes Insurance Companies may not be willing to offer a Special Perils policy for older buildings without major updates (with old electrical fuses rather than circuit breakers, older roofs, etc.) Also, if insured with CITIZENS you will have a Basic Perils policy (as they do not offer Special Perils).

Recommendation: Whenever possible, buy Special Perils, as this will provide coverage for Water Damage from Plumbing Fixtures and Damage by Burglars. Most companies will not charge extra for Special Perils.

 

COINSURANCE

 

Confusing words to most people, but its intent is to penalize you for not insuring to value.

 

The easiest way to explain is through a sample equation:

 

Assume your building is valued at $1,000,000.

The coinsurance clause on your policy is 80 percent.

This means that the insurance company will allow you to insure for 80 percent of the value, which is $800,000.

Your insure for $400,000.

You have a claim for $100,000.

Do not expect to be paid $100,000.

The formula: Have ($400,000) x the Loss ($100,000) = $50,000 is what you may expect to be paid. Should have ($800,000)

Recommendation: Know the replacement value of your building and coinsurance percent of your policy.

 

LIABILITY COVERAGE

 

Be wary of exclusions. Some companies will include exclusions, such as assault and battery, which will negate coverage in the event of someone being assaulted and injured while at the property. Due to the bad economy, there has been an increase in assault related claims. Some companies are now looking at the crime reports for the zip code or area, to decide on whether to include this type of exclusion.

Recommendations: 

1. Never buy a policy with an assault and battery exclusion (there is no way to control this type of claims and they happen).

2. Try to buy your liability coverage from an admitted company, even though there are many top rated surplus companies. Their current rating does not guarantee that they'll be in business years down the road and many liability claims take years before they are settled.

 

ADMITTED vs. SURPLUS COMPANIES

 

Admitted or licensed companies contribute with part of the premiums to the Florida Insurance Guaranty Fund, which was established by state law to protect the consumer, by paying claims and refund of premiums when a company goes insolvent. The Florida Insurance Guaranty Fund guarantees up to $500,000 per policy. The state regulates the premium rates charged by admitted companies.

 

Unlike admitted companies, surplus companies, even though authorized by the state to sell policies, after review of their financial condition do not have the backing of the Florida Insurance Guaranty Fund. Surplus companies are required to pay taxes, which are passed to the consumer and become part of the premium. Although the imposition of taxes was intended to translate into higher premiums, thus giving the edge to the admitted companies, it does not hold true, as the state does not regulate their rates, which are on occasions lower than those offered by the admitted companies.

 

The reality is that surplus companies have always filled the void left by admitted companies, most of them unwilling to write business in certain coastal areas of the state.

 

Recommendation: Whenever possible, buy coverage from an admitted company. The $500,000 Guaranty Fund is always better than no coverage in the event of an insurance company insolvency.

Article provided by PSC Member:

Angel Castro

South Florida Commercial Insurance Planners