If the value of a comm property has decreases because of economic trends in past two plus years, should the insurance coverage be reduce to follow?
We are getting additional Insurance bids and
Is it a legitimate question for an insurer to request the income of the building?
As we understand it they are insuring the building and not the business, they are suppose to be looking at cost of replacement, right?
Hi,
Replacement cost has little to do with value! As an example take a property that is say 2000 sq. ft. and cost's $70 dollars a square foot to replace ($140k) but is only valued and appraised for $100k and only recieves $800 for rent each month!
An insurer requests income information to compare to square footage and market rents, it tells the insurance company how much square footage is vacant! Vacant units are more likely to attract vandalism and may be more likely to incur more damage in the event of a water leak, gas leak or leaking roof as it probable is not inspected daily!
Construction cost’s may be significantly more than value depending on what area of the country you are in!
GR
Dear GR,
Our current insurance carrier never asked for income data.
Market rent rates are known. The insurance Co. Sent out their inspector and could easily determine the empty unit by the For Lease sign. Water is turned off. No gas utility.
We have local management and security companies under contract. Vandalism is possible but has not been ever a problem.
Insurance company insure value? That hasn’t been happening. Economy trumps that.
Hi,
You know your first post and second post confuse me, you first asked and I quote "Is it a legitimate question for an insurer to request the income of the building?" then I answer you "An insurer requests income information to compare to square footage and market rents, it tells the insurance company how much square footage is vacant! Vacant units are more likely to attract vandalism and may be more likely to incur more damage in the event of a water leak, gas leak or leaking roof as it probable is not inspected daily!" then your answer to my post is and I quote "Our current insurance carrier never asked for income data."
Last time I checked an Insurance company inspector is to gather independant information, it is not likely he would ask you for information however he is more likely to assemble a report much like an appraiser on independant information!
Market rents / leases are well known as insurance companies have more information on market data and loss / risk assessment!
I own a large portfolio of commercial property, the realities are such that tinted / coated windows or blinds / curtains being drawn prohibit the personal inspection into a unit by casual inspection, and in most average size commercial properties the presence of a “For Lease” sign is not an indication of a empty unit or how many units may be vacant as we keep signs on all our properties year round as a call on a sign may not have available units within that property, but may lead to a potential tenant for another local property! (A fifty unit commercial warehouse property is presumed to have 5 vacant units if the known vacancy rate is 10%) And most insurance companies will use this factor to compute there risk assessment reguardless of your actual momentary occupancy rate!
Unless you supply the fact that your specific property has water turned off and locked, has no fire sprinkler system and has no gas utilities and power is turned off and locked at the meter I have no idea how to answer your question!
I am certainly glad and I am sure your insurance company is glad you have secured professional management, and security companies certainly help but I am not sure you completely understand risk assessment and the management of that risk? Although I used Vandalism as one component I was not asked to write a thesis on every known risk known to man and the applicable odds of that risk occuring in Southern California!
I am sorry, if the insurance company only had to insure value alone then you would have no protection from accidents on site and unknown risks such as a accident by a service tech, a secretary twisting an ankle tripping down your stairs or the potential of damages to other unit’s in the event a fire sprinkler system activated in the middle of the night!
Your property insurance covers more than replacing your physical structure to as good or better condition!
I invest based on my bottom line, insurance is a cost of doing business and provided I buy the proper policy and the proper protections it is a requirement and the first line of protection for my ultimate protection! And just like the cost of living I expect changes / increases to my policies every few years!
And economy may be a factor, would I charge more for the same building in the economy of Detroit Michigan than in the Economy of Dallas Texas? Probable a huge difference in Premiums
GR
Hi GR,
So to be concise, the insurance company did not have to ask for the income of the building. According to you, they get that information from independent sources, and I believe that.
When I said; Insurance company insure value? That hasn’t been happening. Economy trumps that.
I was talking about the business value not the property value. (remember they were asking for income information).
Now I don’t understand why the insurance company doesn’t just ask if the building has any vacancies instead of income information. Why be coy?
FWIW, we have gone through a thorough business valuation for this commercial property with a respected company and this will be used for estate planning and transfer of property to other family members. Their valuation numbers backs up the fact that the economic trends have lowered the value from its original basis by a significant amount. That is also why I was asking about decreasing insurance coverage levels.
Hi,
I would really sit down and discuss this with your agent? I don't know what state your in? What coverages or combination of coverages are available in your state and whether as a business you can combine coverages or are forced by state law to buy individual policies?
Keep in mind replacement cost’s are going up because labor and materials continue to raise!
The chances of being sued for liability are the same whether the property value is going down or not!
What exactly is covered under this binder and is there coverage for things you have not thought of or factored into price against value!
The business valuation is probable conservative as the appraisal of current value should be more if presented and sold on the open market to an arms length buyer today!
With out knowing your state, the exact parameters of the property and any circumstances warranting additional coverage it makes it tough to make an educated statement which could even be close to being correct without all the facts on ownership, property and business!
GR