Insure This

The Importance of Yearly Valuations

by Various Authors

Q. Should apartment-house owners have yearly insurance valuations?

A. Owning an apartment building is a business. The asset/building(s) incur(s) expenses to keep the revenue/rents coming in, after which, one hopes to see profits. Your apartment insurance program ensures your business can withstand the business risk you accept every day as a landlord and building owner. Therefore, I recommend an evaluation of policy limits, pricing and service every year to ensure you are covered for the risks you face as a building owner and landlord all year long.

An annual apartment insurance program valuation should be based on three categories: price, coverage and service. If you have the best price for the coverage you need, while also receiving the service you require, then you may have a great insurance program in place. Although the most common valuation I see is price shopping, I believe the real consideration should be coverage and service.

When evaluating your current policy based solely on price, different standards may be used. Some use a cost per door valuation (premium divided by the number of doors), while others use a cost per sq. ft. valuation (premium divided by total square feet) and still others could use different methods of evaluation. As property specialists, we use total insurable value and the “effective” rate of insurance you are paying. By comparing the effective rate of your current policy to the market rate of other carriers, we can determine if you are paying too much for your current coverage regardless of limits used. (See www.comcov.com for an online rating tool.)

In evaluating your current coverage, it’s always best to work with your current insurance broker to discuss limits, deductibles and the various types of coverage currently available in the market place. For most properties, there should be several companies to compete for your policy and, of course, your premium.

Some common questions to consider: Are your limits high enough to cover your property? What type of coverage do you have? Are there any specific coverage concerns you have that may be insurable? Where are the weaknesses of the current policy in force?

The last area of consideration is the service you receive from your agent and/or brokerage. If price and coverage are both satisfactory, then service is the differentiator in any product. Only you are able to determine what constitutes good service and what is important to you.
- P.J. Tradelius

Q. I have several buildings, each individually valued for possible loss. I was told that the cumulative value of all my buildings would be applied to any one loss. Is that right?

A. This is a very tricky area and the answer is: it may be right, but probably isn’t. The concept here is that of “blanket limits.” A blanket limit is basically a limit of insurance coverage that covers many items in a group. The problem is that it can mean different things.

One way the term is used is that the limit of coverage is blanketed for all buildings at one location. This is common, for instance, at an apartment complex with five buildings all at one location. Having this type of blanket limit would mean that if the buildings were shown at $200,000 each, giving a total of $1 million of coverage, and there was a total destruction of one building which resulted in $300,000 of actual construction cost, there would be enough coverage to completely pay for the rebuild because the “blanket” limit of $1 million would apply. Please note that I am leaving out any discussion of co-insurance clauses, but a co-insurance clause could reduce the amount of payment if the entire complex is not insured for its proper value. The concept of a co-insurance clause can nullify the value of blanket limits and will be dealt with more fully in an upcoming issue.

The second meaning for the term “blanket limit” is that the limit can be used at any location on the schedule shown in the policy. This occurs, but is not as common, so you must carefully read the wording of the blanket limit. In this latter meaning of the term, it would be true that the total limit for all locations could be used to pay for the damage at one location if the specific limit for that location as shown on the declarations page was not enough to cover the loss. This type of blanket coverage does indeed provide valuable protection; it reduces the chance that there will not be enough coverage by combining the available limit at several locations to cover a loss at any one. The obvious risk to the insurance carrier, and hence the reason it is not found very often, is that an owner could underinsure all of the buildings, depending on the blanket limit feature to provide enough coverage in case of loss. This wouldn’t provide enough premium to actually cover the real exposure, so carriers are very careful when doing this; either the buildings are insured to full value or the policy includes a co-insurance clause, which would limit the claim payment if the building was not insured to value at the time of loss.

There is actually a third use for blanket limits. Some policies provide a very high limit of coverage, typically $250 million or more for every building they insure, even if the actual value of the building is much less, say $1 million. This type of policy typically has no co-insurance clause and this combination of a high blanket limit with no co-insurance clause provides the highest level of safety. In this case, the carrier would actually pay 100% of any covered loss with no worries about the limit of coverage whatsoever. There are at least three programs out there now which use this method. The coverage is provided by national “A”-rated carriers. The limits are for each occurrence, are not shared by other insureds and do not run out. This can provide the benefit of having a large schedule of buildings with a “blanket limit across the entire schedule” and no co-insurance clause to worry about, even for an owner with only one or two buildings.
- David Gordon

The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. Consult the advice of an insurance agent for any specific problem. P.J. Tradelius is with Commercial Coverage, 415-436-9800. David Gordon is an independent insurance broker, 877-877-7755 x 6972 or by email at dave@gordon-insurance.com. Copyright � 2006 by the San Francisco Apartment Magazine. All rights reserved.