Insurance

Probably the most often asked question next to “Can’t you make my policy cheaper?” is: “Do I have enough coverage to replace the building?”

The only person who could answer that with certainty is a contractor bidding on rebuilding the structure today who is familiar with the costs of materials and labor on a daily basis. Since that’s not practical and the number would be a moving target anyway, let’s explore the realistic alternatives.

The easiest way to be sure you have enough coverage is to get a policy with “GUARANTEED REPLACEMENT COST”. This type of policy says that it will pay to rebuild the structure without regard to a specific limit of insurance. So whether it costs $1 million, $2 million or $5 million to rebuild, the insurance company will pay for it. They base the pricing for the insurance on factors such as style of construction and type of materials along with the square footage, number of units and location. It’s important not to confuse “replacement cost coverage” with “guaranteed replacement cost”. Almost all policies are replacement cost but very few are guaranteed. The former merely means only that there will not be depreciation, but the limit of coverage is the limit stated on the policy. The latter means that there no limit for replacement of the structure with one of like kind and quality.

Although the pure form of “guaranteed replacement cost” disappeared after the Oakland fire, there remain several programs which offer the equivalent, by way of a very high building limit which provides security as to having enough money to rebuild. We currently use three different programs, all underwritten by “A” rated national carriers which provide limits of $250,000,000, $300,000,000 or $1 billion of building coverage per building per occurrence. THESE are not annual maximums or shared limits as some of the older programs were. These programs actually provide coverage up to the stated limits for each occurrence of a loss and the limits are fully reinstated after each loss, without regard to losses for other buildings in the program. The fact that the kind of limits we’re talking about here will never be reached for a single building makes them the virtual equivalent of guaranteed replacement cost. Since the cost of these policies is based on those factors listed above and are not based on the amount of insurance (which is fixed at these high limits), the cost of these policies is very competitive and often times less than the standard STATED AMOUNT POLICIES, sold by carriers such as Farmers, Allstate, State Farm, Sequoia, Travelers, CIG and others. These programs, specifically designed for apartment buildings can offer several other perks such as unlimited loss of rental income, boiler and machinery, building ordinance coverage and high limits of umbrella liability.
If you choose to stay with one of the carriers offering standard STATED AMOUNT POLICIES, then you need be very concerned with the actual cost to rebuild. Let’s explore the factors we use to estimate the replacement cost.

Location of the building, even within the same city, can make a big difference. A building on telegraph hill for example is much more expensive to build than a building on flat land due to the extra cost of foundation and hauling of materials.

Construction in metropolitan areas such as San Francisco and the Peninsula are higher then the central valley or outlying areas due to substantially higher labor costs as well.
Type of construction, even with the same materials makes a significant difference. A Queen Anne or Victorian with hardwood floors and considerable exterior detail would likely cost two to three times as much to build per square foot than a rectangular building built in 1962 with little or no detail and carpet of subfloor even though both are standard frame construction.

Number of units per square foot of building area is a factor too. A 10,000 square foot building with 20 studios would cost considerably more per square foot that a 10,000 square foot building with 3 flats. The reason is that each of the studios will have a bathroom and a kitchen adding up to no less than 20 bathrooms and kitchens as opposed to maybe 6 to 10 such installations in the building with 3 flats. In addition, there are many more walls as opposed to larger open spans.

I regularly poll the contractors in the area and am also involved in the rebuilding of structures damaged by water and fire losses. Here is the best info I have at this time. Remember that these are figures for “ground-up” construction. Remodeling or repairing with the framework of an existing structure is much more expensive than starting from scratch.
Now the range can go higher or lower depending on many factors; I’ve seen homes in Woodside costing upwards of $1,500 per square foot, but with a quick walk-through of your building, most insurance professional or construction professionals could give you at least a reasonable estimate of replacement cost.

In wrapping this up, I would say that clearly the safest way to be sure you have enough coverage is by having the insurance company take that risk by purchasing a policy with a guaranteed replacement cost of “high limit replacement cost”. If you choose to use one of the standard type policies with a stated limit, just be sure to review it regularly.

David Gordon, CLU is an independent insurance broker who has been providing insurance products and consulting to commercial property owners for over 25 years. Feel free to contact us at 650-654-5555 or
DGordon@GordonInsurance.com
for more information on any insurance matter or if you would like to see a particular subject addressed in future issues.