Business owners are frequently under-insured
Building valuations must include materials, rebuilding costs and updating to current building codes. (Photo: Shutterstock)
Business owners are often so busy that they rarely have time to step back to re-evaluate their business insurance policies. While this determination and work ethic are admirable, it could leave a business vulnerable and unprepared should disaster strike.
In the wood niche, building material dealers, manufacturers and sawmills are often so focused on running the business that they don't ensure that the company and its growth are insured. New inventory, machinery and equipment; building expansions; additional warehouse facilities and more all need to be properly insured so if a catastrophe arises, the business can rebuild.
Claims adjusters see this all the time. They enter a building after a fire or other devastating event, finding on site is very different from what is described in the business owner's policy.
The insurance coverage is not enough to remove the debris, pay for the increased cost of building materials, and complete renovations
to update the new building with the latest building codes, let alone cover new equipment and a warehouse add-on.
A growing problem
The issue of insurance-to-value (ITV) is an ever-growing concern for all insurers. The Pennsylvania Lumbermens Mutual Insurance Company conducted a study on a sampling of its book of business using valuation software. The company found that its portfolio paralleled the industry with underreported values.
This raises a number of concerns, including the possibility of exposing agents and brokers to errors and omissions claims. Often after a loss, business owners are unable to build a new, comparable facility because they were under-insured.
Consider a property claim on a manufacturing site where the policyholder was underinsured. The damage was estimated at $1,415,000, while the insured only carried $924,000 — nearly 20% less coverage than needed.
A hardware store was devastated by an accidental fire. A visit from the claims adjuster revealed the property was underinsured with coverage of $139,000 or only 39% of the $392,000 building valuation.
The sweet spot
With today's technology and predictive tools, determining accurate ITV estimates should not be difficult. After the policy is bound, don't wait until a claim to check in with the policyholder.
Building valuations must not only adjust with the rate of inflation, but the rising cost of building materials, electrical, plumbing and HVAC work, along with the cost of getting a new building to comply with updated building codes. Too many businesses — nearly 40% of small businesses — are unable to afford to rebuild and simply close up shop after a devastating loss, according to the Federal Emergency Management Agency.
Insurance adjusters can play an important role in correcting this problem. Adjusters who are on site after disasters that do not result in a total loss can bring the current value of the property to the attention of the referring agent or broker, the carrier, and in some cases the policyholder. This can serve as a reminder for the agent or broker to check in with their insureds and let them know the coverage they have and what an updated estimate of rebuilding their property would be.
By performing this due diligence, agents, brokers, adjusters and carriers, can be sure their policyholders are getting the best service they can, while agents and brokers are protected from E&O claims, and carriers avoid costly litigation.
BY JEFF HENDERSHOT at Property Casualty 360