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Coinsurance: “But My Building Isn’t Worth That Much!”

How many times have you had the discussion with your agent about being “underinsured”? It’s a topic that frustrates many, as your thoughts of a total loss often take to you the inevitable statement, “But my building isn’t worth that much!” And in terms of the real estate market, you may be absolutely correct.

However, in the insurance world, it all depends on how you choose to insure, which leads to three important questions:

  • Will I rebuild or repair if I have a partial or total loss?
  • What does my insurance policy say?
  • How might I be penalized for underinsuring?

If you’ve chosen replacement cost valuation, you are obligated to replace or repair the damage caused by a loss. You are also required to carry the proper amount of insurance to cover the loss dollar for dollar.

Many insureds find themselves in coinsurance penalty circumstances due to insuring for market value rather than replacement cost. While it’s true that market value could be substantially less than replacement value, if you’ve chosen to replace or repair the damage after a covered loss, insuring for the correct amount is necessary and required in order to cover the loss. Otherwise, you will suffer a penalty for underinsurance.

Example: You own a 40,000 square foot building that was built in 1970. At that time, it cost $1.6MM or $40/square foot to construct.  In today’s market, the same building now costs $80/square foot to build, or $3.2MM total.

If you choose to insure for the original building value and do not adjust for current costs, at the time of loss, you will collect 50 cents on every dollar of loss minus your deductible. This means a $500,000 loss would pay you $250,000 minus your deductible. Ouch!

McConkey strongly suggests you obtain a professional replacement cost appraisal to be sure at the time of loss, you are fully covered. So instead of thinking, “But my building isn’t worth that much!”, ask yourself: “How much will it cost to replace my building?”

Mark Chimock

Author Mark Chimock

Business Insurance Executive
mchimock@ekmcconkey.com
717-505-3104

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