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Should You Revisit Insured Property Value Estimates?

One of the first steps in obtaining commercial property insurance is to determine the value of the property being insured. The reported property value will drive premium amounts and, importantly, represents the property loss exposure.

Some commonly used property valuation methods include: obtaining an appraisal from a third-party firm; utilizing fixed-asset records adjusted for cost inflation; or using a simple benchmarking factor, such as dollars per square foot. In some cases, utilizing a simplified valuation approach can provide a reasonable value estimate with minimal effort. On the other hand, performing an appraisal (which insurers typically consider the “gold standard”) can provide much-needed accuracy and thoroughness, but will require a greater commitment of time and resources. 

At times, elevating the accuracy of a property value estimate can provide significant advantages during the insurance placement process. The key for risk managers, brokers and insurers is to recognize situations in which an accurate and comprehensive property valuation is critical. Consider these eight factors in the context of the insured property to see if a deep dive into the value estimate is necessary:  

  1. Size of exposure and riskiness of operation
    When property exposures are immense or operations are inherently risky, a thorough estimation process should be conducted every three to five years. Refineries and chemical processing plants with billion-dollar exposures and high-risk operations are a prime example—the stakes are too high to rely on cursory valuation methods over the long term.
  2. Changes in costs  
    Over time, some property costs will change more than others. These fluctuations are primarily driven by changes in technology, capability, and material and labor costs. As of this writing, there have been significant increases in commodity prices such as steel and lumber, which are driving up the costs of new property and equipment. When property is subject to a rapidly changing cost environment, this complexity needs to be carefully considered within the estimation method.  
  3. Complexity and scope of property 
    Global operations and complex properties often require a thorough analysis to be performed periodically. There is simply too much detail and nuance to use an abbreviated estimating approach for an extended period without introducing the possibility of significant error. Many global firms establish a multi-year process in which a comprehensive analysis is performed on a portion of properties each year.  
  4. Type of capital expenditures 
    A company’s capital expenditures typically represent either new asset additions or improvements to existing assets. Accounting for new assets is a straightforward process of addition. However, capital expenditures that represent improvements in condition may not translate directly into increasing replacement value for insurance purposes. This is a frequent occurrence within heavy industrial and processing operations and can result in an overestimation of value if not properly analyzed.  
  5. Major changes to business or operations 
    Major changes within a business, such as reconfiguring a manufacturing facility, adding production capacity, acquiring new businesses, consolidating operations, or relocating an operation, are likely to result in changes to the property and assets. Making a diligent effort to assess these circumstances in detail will help establish an accurate property value that can be used going forward.  
  6. Insurance market conditions 
    As of this writing, the property insurance market has experienced substantial price increases for three consecutive years. When insurance prices are high, developing an accurate estimate of property value will provide assurance that the coverage is neither more nor less than necessary. Developing reliable and accurate value estimates can also be a key differentiator for insureds when engaging with insurers in a difficult market.  
  7. Recent losses reveal inaccurate value estimates 
    Insurers will seriously question the validity of reported property values if a recent property loss reveals large inaccuracies in reported value estimates. In this case, performing a comprehensive valuation of the insured property is the best course of action.  
  8. Adjusting value estimates over time 
    Many companies adjust value estimates from the prior year to account for cost inflation. The accuracy of this approach will diminish over time. For typical commercial properties, conducting a comprehensive valuation every five to eight years can help recalibrate value estimates.  

Correctly valuing insurable property is one of the most critical inputs for managing property risk. While a shorthand valuation estimate may suffice in some circumstances, it is not a perfect solution to every situation. Sometimes there is no substitute for a thorough and diligent value estimate. Striking the right balance between valuation accuracy and effort requires knowing when an estimate is good enough and when it is not.  

Key Insurance Considerations in a Record Hurricane Season

The active 2020 hurricane season has produced so many named storms that scientists ran out of traditional names and have moved to the Greek alphabet for the first time since 2005. Most recently, Hurricane Sally struck the Gulf Coast, making landfall in Alabama with winds above 100 miles per hour, causing widespread destruction, and leaving hundreds of thousands of residents and businesses without power. Ensuring that your business’ insurance program is ready to deal with such perils will prove critical to maximizing insurance recovery for business interruption and property damage claims. Below are critical steps policyholders can take now to ensure that insurance available if and when it is needed.

Locate a Copy of Your Policy

Having your policy on hand prior to a loss will help start your claim as soon as possible, as it may be more difficult to contact your insurer or broker following a storm, when thousands of claims are taking place simultaneously. Your policy will also provide important information regarding how to get in touch with your insurer following a loss.

In addition to windstorm and flood coverage, commercial policyholders should ensure that they have the following specific coverages in place before a storm hits:

  • Physical Loss or Damage to Insured Property: This is the basic coverage afforded under almost all commercial property policies. Policies generally cover the cost to repair, replace or rebuild property that suffers physical loss or damage. Covered premises are usually listed or scheduled in the policy and may include not only buildings, but also equipment and business personal property such as furniture, machinery, and stock. Although typically a lesser concern, many policies do not include coverage or limit coverage for outdoor landscaping and paved surfaces like parking lots.
  • Debris Removal: This covers costs incurred when removing debris from covered property damaged by an insured peril such as a windstorm. The maximum policy benefit for this coverage is usually expressed as a percentage of the total loss.
  • Expenses Incurred to Mitigate Loss or Damage: Property policies often cover expenses incurred to prevent or minimize loss or, where some loss has already occurred, to mitigate additional loss. In fact, many policies say the policyholder must take steps to safeguard the property and prevent further damage. Failure to do so could jeopardize coverage.
  • Extra Expense Coverage: Extra expense coverage is intended to indemnify the policyholder for expenses that are above and beyond the business’s normal operating expense that are incurred to continue operating the business after damage has occurred. Examples may include the cost of a generator when electricity is lost, increased costs to secure new materials or replacement inventory or costs to operate at a temporary location.
  • Business Interruption Coverage: Business interruption coverage is designed to cover lost business income resulting from the total or partial suspension of operations due to covered property damage. Typically, this coverage does not apply until after a designated “waiting period”—usually defined in hours—which operates as a sort of “deductible.”
  • Orders of Civil Authority: Coverage may also be available when business income is lost as a result of government directives, issued because of property damage to other property, which prevent or restrict access to the insured property. These can include evacuation orders or curfews. These losses may be recoverable even if the company’s own property has not been damaged.
  • Ingress/Egress Coverage: Similarly, many policies cover losses when entry to or exit from a covered property is prevented or hindered by damage of the type insured under the policy, such as downed trees covering a road or a broken bridge. Importantly, the damage need not be to insured property so long as the damage prevents ingress to or egress from an insured location.
  • Service and Utility Interruptions: Some policies may also provide coverage for business interruption losses and extra expense caused by power, water, and telecom outages if those outages are the result of an insured event. This coverage is typically sublimited.
  • Contingent Business Interruption Coverage (CBI): Contingent business interruption insurance and contingent extra expense coverages provide reimbursement to the policyholder for lost income and extra expense resulting from property damage to a separate, non-insured property, often in the policyholder’s supply chain. The third party could be a supplier of critical materials or components; a transporter of goods, materials or resources; or a wholesaler, retailer, or customer who purchases or consumes the insured’s goods on a regular basis. Some policies may offer this coverage for “leader properties” or “attraction properties” within a specific mile radius of the insured property.
  • Extended Period of Indemnity: Policies may also provide for an extended period of indemnity, thus extending the time of covered business interruption losses from the time the property is repaired for several additional months. This coverage is designed to ensure coverage for any “ramp up” period the policyholder experiences to ensure coverage until business returns to normal.
  • Spoilage Coverage: Commercial property policies for food-service and hospitality industry insureds may also contain endorsements providing coverage for loss of perishable stock at the premises of the policyholder.
Have an Insurance Response Team in Place Before the Storm

Commercial policyholders should know who they are going to contact for emergency repairs and services. Having an emergency action plan in place, with cell phone contact numbers, will minimize downtime and maximize recovery efforts after the storm. Document or photograph your pre-loss inventory and other insured assets to provide to your insurer when adjusting your claim. They may not be able to reach your property immediately following the storm.

Following the storm, your team should set up a general ledger to capture all storm-related costs, expenses, and time, including costs incurred to mitigate storm losses. Designate a point person to liaise with the insurer’s adjuster and to submit storm-related invoices, quotes and contracts.  Document everything, including physical damage, evacuation orders, curfews, power outages, supply chain disruptions, and extra costs.

Present Your Claim As Soon As Practicable

Insurance companies require prompt notice of a loss. Once the claim is submitted, check your policy regarding the submission of a proof of loss, as is often required. These documents have deadlines, some of which are triggered without any request from the insurer. Request an extension if you need one to ensure timely submission. Use photographs, videos, or other documentation to substantiate your claim, and keep a log of all communications with your insurer and adjuster, including phone calls. An accurate timeline of communications will assist in any potential litigation regarding your claim.

In the event of a denial, delay, or recovery smaller than required to repair your business, experienced coverage counsel can help you analyze your policies, enforce your rights and hold your insurer to their contractual and statutory obligations.

How Small Businesses Can Prepare for the Next Natural Disaster

As we have witnessed these past two months, Hurricanes Harvey, Irma and Maria devastated many parts of the south coast and the economies of Texas, Florida and Puerto Rico. The damage from the storms is expected to halt U.S. GDP by an entire percent. Recent estimates put the costs of recovery at around $85 billion and $59 billion for Harvey and Irma respectively.

While larger businesses have the resources to rebuild and recover, many smaller businesses do not. They will likely struggle to account for the cost of repairs, and even lose their companies in the process. According to FEMA, nearly four in 10 small businesses struck by a natural disaster are forced to permanently shut down. With more storms expected in the coming weeks as hurricane season persists through November, it is vital that small business owners prepare in the meantime.

The first step for any small business is to prepare internally. Here are three best practices that small-business owners can adopt to prepare for a future hurricane or any other natural disaster.

  1. Establish a recovery plan: Often, disaster recovery plans fall to the bottom of small-business owners’ to-do lists, especially if their business is located in an area that doesn’t typically experience high-risk weather. However, no business is immune from a harmful storm’s impact. So disaster preparedness starts with a formal plan that’s comprehensive and allows the company to quickly restore its normal operations following an emergency.
  2. Discuss your plan with all employees: It is crucial for your entire staff to be on the same page when it comes to what your disaster plan involves in order for it to be effective. So once small-business owners have a plan in place, they need to ensure that their employees know what’s included and what their responsibilities are should a natural disaster strike. Owners can share this information by emailing a copy to all employees and discussing the plan in detail at the next all-hands meeting.
  3. Back up your business’s data: Small-business owners should ensure their data is backed up both virtually and physically in a secure location. Doing so can prevent a natural disaster from turning into an even worse data loss debacle.

While following these steps can get small businesses on the right track toward hurricane preparedness, no company can be fully protected without insurance. With a plan in place, the next step is finding the right hurricane insurance plan. But there is often confusion over what proper hurricane coverage looks like.

Small businesses should take into account the specific rules and regulations of their industry when choosing an insurance plan to protect against hurricanes and other natural disasters. That said, there are two policies that are essential to businesses that need a defense against hurricanes.

Commercial Property Insurance is a policy that helps cover some of the cost to repair damages or restore your business property should a natural disaster cause harm. It is important to note, however, that many commercial property insurance policies only protect damages caused by hurricane winds, not flood damage resulting from rising water. If your business is located in an area prone to hurricanes, ask your insurance provider about “riders” (also known as endorsements), which can be added to your policy for more complete coverage.

Business Interruption Insurance is a policy that helps companies deal with the extended time (and business) they may lose as a result of hurricane damage. Often, this forced, lengthy pause in operations is what causes small businesses to permanently close, due to the high costs they incur and their inability to generate the revenue required to cover those costs. Business interruption insurance helps small businesses through by providing the funds for necessities such as taxes, loan payments, rent and salaries. Again, it is key to ask your provider exactly what a policy covers before purchasing it. Typically, business interruption insurance only protects your business if the circumstance that forced you to shut down is already covered by your commercial property policy.

This year’s Atlantic hurricane season has already been deemed the third worst on record. With more than a month to go, small businesses can ensure that they’re protected from damages through internal company policies and a thorough insurance plan. As far as hurricane insurance coverage goes, it’s crucial for businesses to do their research and find the policies that will provide the best protection. Although developing these plans will take time and effort, the risks mitigated and money saved as a result will be well worth it in the long run.