Some businesses select the lowest commercial property limit of insurance that will comply with the policy’s coinsurance requirement. It is important to realize, however, that this serves only to prevent a coinsurance penalty. It does not prevent underinsurance.
Blindly insuring to only 80 or even 90 percent of the insurable value of the property can result in significant financial hardship in the event of a total loss. Unless the policy has a blanket limit covering several insured locations, businesses should insure to the full 100 percent replacement cost value of the covered property to be certain that there will be adequate funds to replace it in the event of a worst-case loss. (IRMI publication May 2007)
Selecting an appropriate limit of coverage for your building is relatively straightforward. It is basically the cost to rebuild a similar structure to the one that is being insured. Be sure to include any and all items listed under the Commercial Property form.
“Building” Standard Covered Property:
- Buildings and structures identified in the declarations
- Completed additions
- Fixtures (indoors and outdoors)
- Permanently installed machinery and equipment
- Owned Personal Property used to service and maintain the building and premises
- Additions under construction, alterations and repairs to the building or structure, if not covered by other insurance
- Materials, equipment, supplies and temporary structures on or within 100 feet of the premises that are used in making the additions, alterations or repairs.
There are several resources available to help you determine what it would cost to replace your building.
Obtain a building appraisal from a qualified professional.
Use the insurance company’s replacement cost estimator.
Use your own replacement cost estimator. Marshall & Swift (www.marshallswift.com) offers the same automated program used by insurance companies for sale to the public.
Author: Bonnie Tomé, ARM, CIC, AU, AAI, AIS, AINS, CISR
Commercial Account Manager