With budget preparation right around the corner, most property managers, board members and owners are taking a close look at their upcoming expenditures. In this economy, it is essential that each dollar be spent wisely, and bring the maximum return. the co-insurance value, the carrier will pay the loss up to the policy limits, minus the deductible. However, should the property fail to insure to the co-insurance percent-age, the insurance company will not pay to the full limit of the policy.
 

INSURANCE APPRAISALS MAY SAVE YOU MONEY
By Bruce D. Riemann

 

 

What is an insurance appraisal? In basic terms, an insurance appraisal is a replacement cost analysis that provides an accurate estimate of the amount of insurance required to replace each structure and amenity insured exactly as it stands when the report was prepared.

 One item that is sometimes neglected in budget preparation is an insurance appraisal. It is important to note that in today’s market, in many instances, insurance carriers are requiring an up-to-date insurance appraisal before they will write coverage for the property.

What is an insurance appraisal? In basic terms, an insurance appraisal is a replacement cost analysis that provides an accurate estimate of the amount of insurance required to replace each structure and amenity insured exactly as it stands when the report was prepared. Some association boards opt to esti-mate the amount of insurance needed, or estimate the percentage to increase their coverage from year to year. If a property has never had an insurance appraisal performed, previous policy limits may have been based on erroneous values. By estimating the percentage to increase coverage each year, this error may have been perpetuated, if not increased. This could result in the property being over-insured, in which case property owners are paying excess premiums, or the property could be underinsured, in which case owners could be faced with having inadequate funds to rebuild the structure, should a loss occur.

As stated already, many properties have reported that the carriers are requiring an insurance appraisal before they write coverage. Other properties are find-ing that the carrier is willing to write the coverage, but only with the insertion of a co-insurance clause. The co-insurance clause requires that the property be insured to a certain percent of value, usually 80 percent. (Although this example represents a typical insurance policy for condominiums, it is not meant to provide an interpretation of an individual condominium’s insurance policy.) Should there be a loss and the property is

 

Let’s look at a theoretical case. Condominium A is valued at $750,000, and has an 80 percent co-insur-ance clause. Therefore, in order to satisfy the co-in-surance clause of the policy, Condominium A needs to insure the property to at least $600,000. However, the board under estimates the insurable value of the building and chooses to obtain a $300,000 policy with a $2,000 deductible, and has therefore only insured to 50 percent of value. If the property incurs a $200,000 loss, the insurance company will pay 50 percent of the loss ($100,000) minus the deduct-ible. The association will receive only $98,000 from insurance and will be responsible for the remaining $102,000. If Condominium A had chosen to have an insurance appraisal performed, the building would have been insured properly, and no co-insurance penalty would have been applied. The association would have then been responsible only for the $2,000 deductible.

Another instance in which obtaining an insurance appraisal could save associations money is in limit-ing litigation. We recently heard of an association in which a loss occurred. Owners in the association felt that the board had been negligent in providing for proper coverage of the property and sued. The board was found not to be at fault, but only after months of litigation and legal fees. Had the board and man-ager obtained an insurance appraisal, the litigation would have been avoided.

You can see why more board members and man-agers are discovering for themselves the value of an insurance appraisal. Having a third party construc-tion cost valuation performed not only provides the correct insurable values, but also provides peace of mind for the board, the manager and the agent.

Bruce D. Riemann is a certified construction inspector and is the senior appraiser at GAB Robins North American Inc. in Lake Mary, FL.