| One of the issues that frequently arises with clients is | | | | your agent or broker. Insuring for a lesser value |
| the issue of how much would it cost to rebuild the | | | | reduces the premiums and there is no reason to pay |
| building they own if it were lost in a fire or other | | | | the higher cost if you would not rebuild. |
| catastrophe. Often the Insured will say something like | | | | Another comment that we sometimes hear is that |
| "I talked to a friend who is a General Contractor and | | | | the building is sprinklered and made of concrete so a |
| he says he could build it for $50 per foot" and they | | | | total loss is impossible and that it makes sense to |
| resist insuring the building for any more than that. | | | | insure the building only for the amount that might |
| While the $50 per foot number may be accurate for | | | | actually be damaged. Nearly all property insurance |
| the actual construction cost it is probably not the | | | | policies contain coinsurance clauses that penalize |
| whole story. The following may shed some light on | | | | policyholders for under-insuring their property and this |
| the folly of relying on such an off the cuff estimate: | | | | strategy will likely backfire even in the event of a |
| It may not include the cost of removing the debris | | | | moderate loss. |
| of the original building and demolishing whatever is left | | | | The most accurate way to determine the correct |
| of it. This can be very expensive and time-consuming | | | | Replacement Cost is to have an appraisal performed |
| especially if any environmental issues exist such as | | | | every few years and to adjust that value every |
| lead, asbestos, chemicals, etc. | | | | year based on a construction cost index plus any |
| - It may not include an allowance for architectural or | | | | additions or improvements made. This can be rather |
| engineering fees. | | | | expensive and very few clients actually do this. The |
| - It may not include any permits that may be | | | | most common approach is to use the Replacement |
| required | | | | Cost estimates provided by services such as Marshall |
| - It probably contemplates just a basic shell and may | | | | & Swift/Boekh. These companies track rebuilding |
| not include additional costs for tenant improvements, | | | | costs based on actual losses and are widely used by |
| offices, additional wiring, air conditioning, etc. | | | | insurance companies and brokers as guides. |
| - It may not include the General Contractor's | | | | Remember that these are based on averages and |
| overhead and profit. | | | | your building could be significantly above or below the |
| - It does not include financing costs such as interest | | | | estimate. |
| and fees. | | | | We subscribe to Marshall & Swift/Boekh and provide |
| There may have been a change in building codes that | | | | free estimates to our clients. If you would like to |
| do not allow the building to be rebuilt the way it was. | | | | discuss your situation please feel free to contact me. |
| (See future articles for a further discussion of this) | | | | The good news is that building insurance is normally |
| Another misunderstanding has to do with the issue of | | | | relatively inexpensive. The insurance on a typical |
| market value. There is no relationship between | | | | California building is usually only about $1.00-2.00 per |
| market value and Replacement Cost. Market value | | | | $1000 of coverage so the cost of increasing the |
| can be considerably higher than Replacement Cost if | | | | coverage to a more appropriate amount is usually a |
| the ground is valuable, or considerably less when the | | | | fairly minimal increase in the cost of the overall |
| real estate market is soft. Market value should be | | | | insurance program. In fact often the cost can be |
| discussed but primarily in the context of whether it | | | | offset by a slightly higher deductible. |
| makes more sense to rebuild or move to another | | | | This discussion has been focused on the |
| facility. | | | | Replacement Cost of a building, but many of the |
| By the way the insurance will only pay Replacement | | | | same issues could arise when insuring Machinery and |
| Cost if the building is actually rebuilt. If your intention | | | | Equipment. Don't forget to include the cost of |
| is to move rather than rebuild then Replacement | | | | transportation, taxes, removal, disposal, installation, |
| Cost is probably not the best option and you should | | | | testing, financing, etc. |
| discuss alternatives such as Actual Cash Value with | | | | |