Building Coverage: Determining Value

There’s a saying in Texas that “everything is bigger”. The last thing any commercial building owner wants is for that to be true about their insurance premium. But with the recent weather events ,and increase in construction, insurance companies have adjusted rates. That has led building owners to reevaluate the coverage on commercial properties. A common question that I hear is “who decides how much is replacement cost?”. Short Answer: The owner of the building. It’s your policy and you have the right to insure the building for whatever you want. With that said, there could be stipulations about how much your coverage can vary from what the carrier deems as “replacement cost”. But that’s a story for a different day. Let’s review several points to insure your commercial building coverage is on target.

Construction Type
Wood, steel and concrete are the most common materials. Identifying your commercial building construction type is the first step in determining replacement cost. Wood frame buildings have a considerably different cost than steel frames. Adding a brick or stone facade can change the coverage amount as well. Besides construction cost, the construction type impacts the insurance rate. Wood buildings might burn just a tad faster than steel.

Attached Equipment
This refers to anything that is permanently attached (i.e. bolted down). Insurance Tip: Some carriers allow you to include this under your building coverage. Including is under building coverage, instead of business personal property, may decrease your premium. The best example I can give is that of a car wash. Customers drive up to the kiosk. Pay their fee and then pull directly up to the car wash tunnel conveyor belt. The customer stays in their vehicle the entire time. Upon completion, they drive off or pull over to the vacuum stations. Not a lot of space is needed. A 4,000 square foot building may cost them $400,000 to replace but they insure it for $1,100,000. Why? Because they have $700,000 of equipment in the tunnel. The equipment is covered properly and they saved on their insurance premium.

Valuation
Replacement cost or Actual Cash Value. The valuation type chosen dramatically impacts building value. Replacement cost looks at a 15,000 square foot commercial building and says “it will cost $1,750,000 to rebuild if destroyed by a tornado”. The owner insures the building for $1,750,000. After a tornado hits the empty building over the weekend, the owner is issued a check for $1,750,000 to rebuild. Actual Cash Value takes the same scenario, except the owner receives a check for $1,000,000 because due to its age.

I hope that helped.
Thanks for reading!