How Much Should I Insure This Building – Part 1

Often I hear from clients, “How much should I insure this building for?“
Well, that is a great question. This question is difficult at best, and almost impossible to answer. Determining the insurance on a building is not black and white. There are several issues that make this question difficult to answer. When assessing building insurance there are a number of items to take into account:
  • Timing of the Property Valuation. The cost to rebuild property is determined in advance, while the actual cost to rebuild property isn’t determined until after the loss. Why is this a problem:
  • If a disaster occurs that affects a large area, for example the tsunami in Japan or a large earthquake in downtown Los Angeles, the cost to rebuild will be inflated over-night. So the initial rebuild cost will no longer be valid.
  • Increases in construction costs can cause co-insurance penalties. Unfortunately, this cannot be identified before an actual loss.
  • Age of the Building. Does the age of the building create special challenges that are hard to quantify? Is the building on a historic registry?
  • Building Codes. Have the building codes changed requiring a significant upgrade in construction materials or construction methods?
  • Unique Features. Does the building have unique building features that increase the cost of construction when compared to a building of similar age and type?
  • Structural Changes. Has the tenant had any improvements or betterments installed?
All of these issues can create problems when determining the proper insurance limit for a building.
Insurance is a sunk cost and it is human behavior to attempt to keep the cost at a minimum. However, for a Property owner not properly insuring your building can be financial devastating if a loss occurs. The problem of insufficient insurance limits can become compounded by triggering penalties in the policies co-insurance clause. More about co-insurance in another post.

Workers Compensation Premium Surcharge

Question: Why am I receiving a Workers Compensation premium surcharged for a business I just bought?
So you just bought a business, congratulations! As a business owner there are a couple of things you should know when it comes to Workers Compensation.
In the State of California it is important to know the Experience Modification (Ex Mod) of any business you are considering purchasing. The State has very specific rules regulating when the Ex Mod will stay with the business (nominal change), even if the business has new management, and when the Ex Mod will not transfer to the new owner (material change).
You may be wondering why the Ex Mod of the business you acquired is important; if you purchased a business with a debit Ex Mod you may inherit the surcharge. As an example, let’s assume you purchased a business with an Ex Mod of 150%. If the going rate for the governing class of business is $10.00 per $100.00 of payroll, you will be paying $15.00 per $100.00 of payroll (before additional credits or debits). You will be paying a 50% surcharge on your Workers Compensation coverage. A well run competitor down the street may be paying $10.00 (versus your $15.00) for employees engaged in the same activity. You are at a competitive disadvantage. To make matters worse, if your competitor down the street has actually controlled their Workers Compensation losses they may have a credit Ex Mod. Instead of paying $10.00 per $100 of payroll, if we assume that they have an Ex Mod 75%, they would be paying $7.50 per $100.00 of payroll (before additional credits or debits). In this case if you inherited an Ex Mod of 150% you are paying DOUBLE for the same state mandated coverage (versus the competitor with a 75% Ex Mod).
What is an Experience Modification? The State of California expects every business to generate a certain level of Workers Compensation losses (segregated by Workers Compensation payroll class). Loss data is collected on statewide basis and reviewed annually. As the loss data is accumulated the Workers Compensation Insurance Rating Bureau (WCIRB) calculates all of the losses by class of business and develops an Expected Loss Ratio (ELR). This ELR is used across the state for everyone with the same Workers Compensation class. Your payroll by class is calculated against the ELR and you now have your expected losses. The WCIRB will then gauge your expected losses against your actual losses. The difference determines if you receive a credit or debit Ex Mod.
What is the point to all of this, and what does it mean to you? As part of your due diligence process when purchasing a business you should look into the Ex Mod and the Workers’ Compensation loss runs. You can do the following with this data:
  • Ask the questions and understand if you are going to be surcharged on your Workers’ Compensation premium
  • Understand the level of attention the current owners are providing towards safety and loss prevention
  • Since the Ex Mod is a trailing indicator, forecast what the Ex Mod will be in future years
  • Give you an opportunity to reduce the selling price for the business you are purchasing
Please keep in mind that the WCIRD issues all Ex Mods, and the rules do change from time to time. To schedule a meeting to review Ex Mod calculations, contact Beissel & Cobb Insurance Services today!

How Much Should I Insure This Building – Part 2

How Much Should I Insure This Building – Part 2: Building Code Upgrade Coverage
As we continue our “How Much Should I Insure This Building” series, this week we look at Building Code Upgrade Coverage and Fire Insurance.
According to the National Fire Protection Association,, “there were 1,331,500 fires reported in the United States in 2010. Of these fires 482,000 were structure fires, causing 2,755 civilian deaths, 15,420 civilian injuries, and $9.7 billion in property damage. Of these fires, 98,000 were non-residential structural fires, causing 90 civilian deaths, 1,620 civilian injuries, and $2.6 billion in property damage.”
No matter how you break it down, these numbers are staggering. Last thing you want as a building owner is to lose a building or a life due to a fire. So with this bit of information rattling around in your head, let’s be realistic, fires do happen. Whether it is an accidental fire that occurs within the building or the result of an outside element (for example a wildfire, or a car runs through your front window), understanding your fire insurance policy should be part of your annual assessment of your
disaster preparedness process. For clarification, we are going to look at fire insurance policy for California and items you, as a building owner need to consider purchasing to cover your costs.
Standard Fire Insurance Policy in California
The standard fire insurance policy does not provide coverage for:
1. Coverage for Loss to the Undamaged Portion of the Building
2. Demolition cost coverage
3. Increased cost of construction
What does this mean to the building owner when you do not have coverage in these areas? Let’s take a look at each issue.
1. Coverage for Loss to the Undamaged Portion of the Building.
A building has damage, but is not a total loss. Current building code in California requires the building to be razed and rebuilt from scratch. The undamaged portion of the building is not covered unless coverage is selected and paid for prior to damage occurring.
2. Demolition Cost Coverage.
The building owner pays all incurred costs, to demolish the undamaged portion of the building and clear the site so reconstruction can take place. However, if this policy is in place, your insurance carrier will pay up to policy limit for the loss.
3. Increased Cost of Construction
If current California Building Code requires installation of items not already in the current building, then without this coverage the building owner would be required to pay these increased costs and not the insurance carrier. A few examples of increased cost of construction are:
a. Installation of elevator not present in pre-loss building
b. Installation of interior fire sprinklers not present in pre-loss building
c. Change in building material from frame to masonry

Limits for each coverage can be identified or a blanket limit can be selected. The key point is that without these particular coverage policies, you can face some serious coverage gaps in the event of a loss. Talk to your agent today to ensure that you have sufficient coverage, and take all necessary steps you can to prevent the loss from occurring in the first place.

It’s not an Apples to Apples Comparison

Are you really Price Shopping or looking for Insurance Coverage?
A common statement I hear from new prospects is that they want a quote with ‘Apples to Apples’ coverage limits. It seems that these insureds are looking for the lowest possible costs with all coverage being equal, but is that really the best way to go about shopping for your coverage?
With this approach, what you are telling the agent or broker is that you are simply a price shopper, and that you will be placing the coverage with the lowest price provider.  Apples to Apples quotes have the tendency to perpetuate prior errors, and only serve as a way to gauge which carriers have the cheapest price for specific coverage at that moment.  Although this may give you financial peace of mind in the short-term, you may be putting yourself, your family and/or your business at risk.
As the agent or broker will focus all of their energy on securing the lowest possible price for you, the risk of exclusion of other important factors is high.  Ask yourself, would you select a doctor based solely on their pricing?  How about a CPA?  If you were facing a criminal charge, would the lowest priced attorney be your first selection?
When it comes to your coverage, you need to be engaged in the process and seek out a knowledgeable broker/agent.  When you dictate the coverage details it also tells the agent or broker that
YOU are in charge of your insurance plan.  We all like to be in charge and in control, but what happens when you have an uncovered loss?  What happens if you could have secured coverage for the loss you just suffered, but YOU chose not to secure? YOU are in charge of designing the insurance plan. When you run your insurance program, you are also responsible for any coverage gaps.
Are you really prepared to be in charge of understanding:
• All of the available coverage?
• Limitations and restrictions in all of your policies?
• How your policies work in relation to the other policies?
• Changes in the insurance marketplace including new coverages that may be available?
• Trends in liability awards?
• Determining the proper mix of coverage?
What about insurance companies?  Are they all the same?  Is the right insurance company for you just the one with the lowest price?  Every insurance company that I deal with is unique in their approach and claim handling.  Every company has their sweet spot when it comes to the clients that fit best within their pricing and abilities.  If pricing was the sole factor in every buying decision we would all drive the same cars.  The reality is, some people like Ford, some like GM, some like Dodge, and some like the more exotic Porsche or Lamborghini;
they all get you from point A to point B, but there are differences with each brand, including the price.
Instead of telling the broker or agent that you want an ‘Apples to Apples’ quote, prepare yourself to ask some of the following questions of your broker/agent:
• What do you recommend?
• Why do you feel that this carrier is the best fit for me? How does that carrier differ from other carriers?
• What am I missing?
• How can I keep my cost under control AND maximize my coverage?
When people ask for an ‘Apples to Apples’ comparison, I always wonder why they would want to take on the risk that can easily be handed off to a competent agent or broker. It seems to me that you would want a quality carrier, that offers good service, and that fits your needs.
As the economy may influence your decision to shop for lower priced insurance coverage, keep in mind paying less up front for lower coverage could cost you more in the end.

Do you want to be your own risk manager?

In the aftermath of Hurricane Sandy, once people have caught their breath, collected their thoughts and ensured their family and friends are ok, the work will begin to rebuild their lives and their businesses. Unfortunately, some will find their insurance will not cover the damages and loss.
A friend of mine, Liz, lives in the path that Hurricane Sandy directed its wrath, and come to think of it she lives in the path that Hurricane Irene decided to take as well. Each time, the Hurricanes hit land, Liz knew that she was protected. Beyond the warm home that protected her through the storm, she knew she had, well thought she had, insurance coverage that would protect her personal and small business should things take a turn for the worse. Lucky for her, she never had to test her insurance policy coverage.
Like so many individuals and small business owners, the first natural disaster was the worst. When the hurricane hit, Liz was unprepared. Although she thought she was protected, she was truly unprepared in knowing whether or not she was fully covered by her insurance. Would her personal belongings be covered if there was flood damage due to a storm? Would her small business be covered if her office sustained damage due to the storm? What if all of her computer equipment was destroyed, how would she get back up and running. Liz’s only source of income and now the potential of being out of business for days, weeks, and possibly months was enough of a wake up call.
After the first natural disaster, Hurricane Irene, the first thing Liz did was update her insurance policies for herself and her business. But did she cover everything?
So you are asking yourself, she lives on the East Coast, what does this have to do with me, I live in California? No matter where you live, insurance coverage is what protects you from being in business and having a roof over your head, to being out of business and with nowhere to live. Whether it is business or personal insurance, understanding your insurance policies, how each of the policies works, and how the policies work together is critical, and up to you.
When it comes to understanding your policy coverage, you need to become your own Risk Manager. While the job of your Insurance Agent is to provide you with all the options and coverage you require, it is up to you to be engaged in the process.
 Do I need:
  • Earthquake coverage?
  • Flood coverage?
  • Different policies for my personal property and business property?
  • What are my deductible options?
  • What happens if I have an uncovered loss?
  • What kind of assistance can I realistically expect from the government in the event of a loss?
  • What happens to my business if I have to close for a period of time?
    • Will I lose my customers?
    • Will they come back once I reopen?
    • Am I in a business that will not allow for an interruption of service/manufacturing?
  • Is there any property that can be exposed to loss that is uninsurable?
    • If yes, then what?
  • Can I set up an arrangement with a friendly competitor to keep my doors open if I need to:
    • Evacuate for a period of time
    • Restart the business after a loss
These are just some of the questions that you should be asking your Risk Manager/Insurance Broker/Insurance Agent. Fortunately for Liz, she never had to tap into her insurance policy, but some people in Hurricane Sandy were not as fortunate. The losses are going to occur, the questions are (A) are they going to happen to you (B) are you prepared for the aftermath of the storm?