Insurance news and information

Photo credit: Flickr Gregor Rohrig

In the last post, we talked about insuring-to-value on a Replacement Cost basis, and about how it is advisable to insure at 100% of RC. We also introduced the concept of Property Coinsurance, which can be thought of as a “quantity discount” that gives you a better rate, provided that the limit of insurance you select meets or exceeds the coinsurance requirements you selected when arranging for your policy. Be aware, though, that to meet the requirements, the limit you select must be adequate at the time of loss – it is not enough to request a limit that is adequate on the first day of the policy.

Here’s an example: let’s say you get a professional property appraisal on your building on October 1, 2009 that says the insurable RC of your building on that date is $1,000,000. Your Property insurance policy renews on January 1, 2010, so that policy will run from 1/1/2010 to 1/1/2011. With that policy, you might be dealing with a loss that occurs on December 31, 2010 – fifteen months after the appraisal. Because your Property Coinsurance clause refers to the RC at the time of loss, if building costs were expected to be inflating at 5% a year, you should have asked for a limit of $1,062,500 (on a 100% coinsurance basis) on your 1/1/2010 renewal, to take care of the actual RC for that 12/31/2010 loss (5% inflation times 1.25 years since the appraisal = a factor of 6.25%).

Building cost inflation factors vary from time to time, and at any given time they will be different in different parts of the country, and they also will vary by type of construction (for example, in the fourth quarter of 2008, building costs for apartment or condo buildings of frame construction might have been 4% higher than a year earlier, while apartments or condo buildings of steel and brick construction might have been 9% higher than a year earlier). Your appraisal company (or your insurance agent or broker) can provide some guidance or advice in these areas as you consider the right limit of insurance to buy.

Even in recessionary times, commodity prices can undergo sharp increases, so one eye should always be kept on the impact of building cost inflation. In times of very high inflation, like we saw some 25 years ago, Property policy limits might need to be adjusted two or three times during the course of the policy year.