Calculating Replacement Costs for Commercial Property
The purpose of commercial property insurance is to protect your building in the event of a partial or total loss. It also helps put your property back to the same like kind and quality after a loss. When insuring a commercial building, you must go through the process of estimating the replacement cost of your building. You will also need to estimate the contents as this is the max limit of coverage and insurer will use for your policy.
By doing so, you have to take into consideration the current costs to replace your building to the same like kind and quality as it was before the loss. Other factors to consider are debris removal, by-laws, code upgrades, labour, and whether current materials are available. You may even have to consider things such as sprinkler systems that may have to be installed due to current regulations.
Calculating this can be overwhelming to someone who is not a contractor or an expert. If it’s not done correctly, it may leave the client with only part of the loss covered or a penalty on a partial loss due to a co-insurance clause. A co-insurance clause refers to a % amount that the insured has to have minimum insured compared to the true replacement. If not, the insured would be subject to a penalty on a partial loss.
Say an insured has their building insured to $800,000 with a 90% co-insurance clause. Upon a partial loss, the true limit of insurance should have been $1,000,000. The insurer has the right to impose a penalty on partial loss. Say the loss is $20,000 and the min. amount of insurance they require is $900,000 on the building. The insurer will use a formula. You would divide the amount insured by the actual min. insurance required. Then take that amount and multiply by the loss.
In this case, a $20,000 loss would only leave the insured about $18,000 due to not insuring to proper value. In the event of a total loss, the insured will only get provided with the max amount shown on the policy.
How is the best way for a client to calculate replacement cost? A client can do this by a few different avenues.
Have a professional appraisal for replacement cost purposes. Ensure it includes debris removal, code upgrades, and by-laws.
Hire a professional contractor or engineer to help determine who will sign off on the values. (Including the above.)
Hire professional risk management companies who specialize in this. Ensure they have tools and calculators that will help with determining replacements costs.
Talk to your broker about other estimate tools/calculators that they or an insurer may have to help. Keep in mind these are only estimate calculations to help assist. It is up to the client to make the final decision on what limit of insurance to use.