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.