National disasters, including the recent Detroit floods and tornadoes, have created a number of problems for businesses and homeowners.
In addition to homes and businesses being devastated by weather events, a new set of unforeseen obstacles have emerged that are directly tied to insurance policies — most notably the limitations and exclusions contained therein, as well as increased premiums being assessed by insurance companies.
These obstacles are important to understand because they pose a new question that impacts every person or entity buying insurance: How do you adequately insure property in a market that sees substantial increases in construction costs and product delays?
The dramatic and rapid increase in the cost of materials and the inability to obtain products is impacting all aspects of construction. Insurance restoration contractors struggle to complete repairs in a timely fashion and for the amounts agreed upon with the insurance company during the adjustment process.
Knowing that construction costs are increasing, have you reconsidered the amount of your insurance coverage to comply with the cost of replacing your property? Although property owners and their agents or brokers should meet annually to discuss coverage, it’s unrealistic to believe this occurs; it doesn’t! In most cases, policy coverage reviews occur every three to five years at best. And unfortunately, insurance policy coverage limits estimated within the last two years are no longer adequate to fully protect your property. In the event of a catastrophic loss, property owners will now be underinsured.
Most insurance policies contain the term “replacement cost.” Insured individuals commonly confess they believe a replacement cost policy provides enough insurance to replace their property regardless of the coverage limitations of the policy. This is simply not correct! A replacement cost policy doesn’t extend the coverage limits, as policies won’t extend coverage beyond the amount of insurance. The term “replacement cost” merely indicates the property is insured for the replacement cost instead of its actual cash value. Actual cash value policies determine coverage on a replacement cost less depreciation basis. They’re a means of valuing the cost of repairs, but not to exceed policy limitations.
Even though the insured did their due diligence making sure to cover the replacement value of their property, construction costs have changed so dramatically during the policy that the insured is actually underinsured.
According to the Federal Emergency Management Agency, roughly 40 percent to 60 percent of small businesses never reopen following a disaster. This statistic is based on disasters during normal times, not the extraordinary times we’re currently experiencing. It’s important to acknowledge that construction costs have increased exponentially in a short period of time. Recognizing your property may be underinsured, it’s important to contact your agent to review your insurance policy limits/values.
Globe Midwest Adjusters International
400 Galleria Officentre | Suite 101 | Southfield, MI 48034 | www.globemwai.com
