CPLA TALKING POINTS FOR PROPERTY COVERAGE

REPLACEMENT COST (RC) AND ACTUAL CASH VALUE (ACV)

REPLACEMENT COST: Means the cost to replace the property on the same premises with other property of comparable material and quality used for the same purpose. This applies unless the limit of insurance or the cost actually spent to repair or replace the damaged property is less.

ACTUAL CASH VALUE: The cost to replace with new property of like kind and quality, less depreciation.

REPLACEMENT COST VS ACTUAL CASH VALUE:

  • Most losses are partial losses

Questions: How is a loss settled if you are insured for ACV?

Example:

  • You have a 2 unit apartment building insured for $90,000(ACV)
  • One unit has a kitchen fire the damage total $40,000.

When the insurance company settles the claim they will take depreciation into account because it is insured at ACV.

Calculation:

  • Kitchen repair: $40,000
  • The insurance company decides the building has depreciated by 40% since it was built
  • Claim payment $24,000

uestions: What if I insure the building at replacement cost?

  • Kitchen repair $40,000
  • Claim payment $40,000

CO- INSURANCE

Most insurance carriers have a built in co-insurance into their policy. This will appear on your policy as a % figure typically 80% or 90%.

Why?

The goal of this is to make sure the building owner is insuring the property within a certain percentage of actual cash value. If you are under insured you may be penalized.

Example:

  • Building A is insured for $100,000
  • A fire breaks out destroying half of the structure
  • The adjustor calculates the loss at $90,000
  • At the time of loss the actual replacement cost of the building is $200,000
  • THE BUILDING WAS UNDERINSURED

Do you have enough coverage to cover the loss?

The formula for co-insurance is:

  • HAVE/SHOULD HAVE X LOSS = CLAIM PAYMENT

How to calculate should have:

$200,000 x 80% co-insurance = $160,000 this is what the building should have been insured for at the time of the loss to be insured at replacement cost.

What will the insurance company pay on the claim?

$100,000/$160,000X$90,000= $56,250.

You will receive a claim check for $56,250 on a loss that will cost you $90,000 to repair.

Does the current carrier know everything about the property?

  • Did they ask if it contains student housing?
  • Does the property contain section eight tenants?
  • Are the updates correct (ROOF, ELECTRICAL, PLUMBING, HEATING)?Does the building have knob and tube wiring?
  • If you fail to disclose these property characteristics to your insurance company or agent your claim can be denied due to a material omission of fact.

BUSINESS/RENTAL INCOME PROTECTION:

  • Does your current policy cover lost rent in the event of a loss?
  • Can you afford to not collect rent while the structure is being rebuilt?

Typically three types of coverage:

  • No coverage
  • Stated amount
  • Actual Loss Sustained (ALS) No limit of insurance but typically has a time period usually 6, 12 or 18 months

MECHANICAL BREAKDOWN COVERAGE:

What does this cover?

While the standard property policy can provide coverage for the structure, contents, and potential loss of revenue in the event of a loss, equipment breakdown is excluded. In order to avoid a coverage gap, property owners also need an Equipment Breakdown policy, which is tailored to cover the loss exposures for equipment and systems installed in their buildings.

Equipment Breakdown includes coverage for electrical systems, air conditioning and refrigeration, boiler & pressure vessels, electronic technology systems, and mechanical equipment. Without an Equipment Breakdown policy, owners are self-insuring substantial loss exposures to their property.

What is not covered?

The Equipment Breakdown policy covers damage to insured equipment and resulting loss of revenue (Business Income) while the equipment is being repaired or replaced. It does not pay for normal wear and tear.

Building ordinance & Law Coverage:

3 coverages involved

  • Coverage A: Loss to the undamaged portion of the building
  • Coverage B: Demolition cost of the undamaged portion of the building
  • Coverage C: The increased cost of construction
  • New laws and code are constantly being passed to improve the quality and safety of new construction.
  • After a loss such as fire new building codes need to be followed to reconstruct the property.

Example: if new codes require apartments to have sprinkler systems and you have an old building that has a fire loss. Without this coverage you will not have coverage to pay for the additional expense to install the sprinkler system.

Example: Code requires undamaged portion of building to be torn down.

  • 5 unit apartment building has a fire that claims 60% of the building
  • The replacement cost of the structure is $300,000.
  • Code requires you to tear down the entire building and rebuild

How will the claim be paid without this coverage?

  • The insurance company will pay for the damaged portion of the building to be torn down. However you will be responsible for the demolition cost to rebuild the undamaged portion.
  • Approximately $120,000

Liability issues for landlords who allow pets. Some insurance carriers will not issue insurance for the following breeds of dogs:

Pit bulls, German Shepard, Akita, dobermans, chow chows, rottweilers, Caucasian mountain dogs, Staffordshire terrier, Beaucerons, Great Danes, American bulldogs, wolf hybrids, or any mixed breed or variation of these types or any dog with a history of biting.

Not every company has the same list. This is probably the most popular ones.