At the end of 2019, after nearly two decades of a soft market, we started to see a ‘firming’ of the commercial insurance industry. Top that with the issues brought about by the COVID-19 pandemic, carriers will continue to raise rates and reduce policy limits in 2020. There are a variety of risk management techniques that a company can address their increasing risk and associated cost.

Maintaining an accurate up-to-date Statement of Values (SOV) is vital for any property insurance program. For many organizations, keeping track of insurable assets by location, proper valuation and classification of those assets can be challenging. If you have gone through a recent merger or acquisition (M&A), hopefully obtaining this information was a part of your due diligence process as failure to maintain a current SOV will not only affect insurance rates, but it can leave your assets exposed to risk. Even if you do have accurate information for the company you are acquiring, that data is likely in a system different from the one you are using. Trying to merge the two systems can be difficult.

Underwriters are evaluating the location and geographic concentration of your properties, buildings, assets and inventory (not to be overlooked, but we’ll look at business interruption coverage later in this article). More specifically, what, if any high-hazard exposures are you facing, including natural risks and/or political risks.

A commonly used term regarding information concerning the physical assets is ‘COPE’:

• Construction – what material is your property built out of
• Occupancy – how is the building being used
• Protection – fixed fire suppression systems, distance to and quality of the nearest fire station/fire hydrant, adequacy of water pressure/supply, etc.
• Exposure – risks posed by the neighboring property or surrounding area; location in or near a flood zone, earthquake, areas of civil unrest or superfund sites

If any given building is lost, how is your business affected?

If any of this information is missing, it will allow the underwriter(s) to make assumptions (usually for the worse) about your business. Readily having this updated information will aid you in receiving the most competitive pricing.

Confirm Your Data

Like most organizations, we tend to get stuck working within our own silo. Often times, there isn’t someone (or department) who works horizontally across these silos. As a starting point, you need to compile a cross-department list of capitalized and non-capitalized assets.

As we know, on our financial statements we have to report our assets. Normally, these assets are recorded in some sort of capitalized property program; the asset, its description, its property classification, the depreciation method, the year the asset was placed in service, the original cost and the accumulated depreciation and for tax purposes the location of the asset. In addition to owned assets, there should be a separate section for leased assets. For example, triple net lease agreements where the tenant agrees to pay all the expenses of the property including real estate tax, building insurance and maintenance. Reviewing the insurance requirements within these lease agreements is often overlooked.

You should have a thorough understanding of what hazards and perils these assets are subject to, as various limits or sublimits could apply. For example, many policies contain significantly higher deductibles and/or sublimits on specific perils such as flooding, earthquakes, hurricanes, coastal winds, wildfires, etc. in catastrophe zones or when damage results from a named storm.

Functional Replacement Cost

For many of the portfolios we handle, no two properties are alike. Whether it be the construction material, value in inventory or the operational criticality, each property is unique. Therefore, it is critical to understand how each location ties into the overall performance of the organization.

In the event of a loss, you need to understand ‘what will go in its place’. What will this location be used for, will the same size, construction material, equipment, etc. be put back in or will something else go in its place? For example, a utility client of ours has buildings that were constructed back in the 1950’s that were originally staffed 24/7. However, as time has gone by and technology has become smarter (smaller), these massive buildings are no longer staffed and the square footage is no longer needed. Should one of them suffer a significant loss, it would be more effective to replace it with a much smaller utility cabinet that costs approximately 1/10 of a newly constructed building. By insuring each location with ‘functional replacement cost’, you will be able to significantly minimize your total insurable exposure.

Calculating Business Interruption

Current global economic and political realities are bringing with it new and evolving hazards. The likelihood that you will have to vacate a premises due to a disaster-related event (natural or manmade) is becoming more prevalent. As we discussed above, it is critical to understand the operational value, or worth, of each location or have a regional SVP or insurance champion to assist you with this. Should any given location be inaccessible, business interruption (BI) insurance can provide coverage for lost revenue, continuing operating expenses and payroll.

For example, if you’re a manufacturer and you have to turn your employees away due to a main plant being burnt to the ground, how long do you think those employees will go without a paycheck until they start looking for another job? Having a good Business Continuity Plan (BCP) in place will help you prepare for instances like these. Additionally, a good BCP will aid in gaining more competitive premium pricing.

Another coverage to look into is contingent business interruption (CBI). This coverage applies to lost income, or extra expense(s) that can result from a loss away from your premises (i.e. from an interruption of business at the property(s) of a customer or supplier). This type of coverage can be applied to a specific location(s) or blanketed across all customer or supplier properties.

For example, a significant loss at a key distributor or supplier’s facility could result in a disruption that lasts weeks or months. Such an exposure can quickly become a serious threat to your everyday ‘normal’ business. CBI can provide coverage for your loss of income, extra expenses incurred to replace or find a new supplier and expenses incurred to prevent further loss (mitigation expenses).

There are many contingencies for CBI coverage to apply and therefore should be carefully and thoroughly planned out.

Coinsurance Clause

Many property policies contain a co-insurance clause; that is, the percentage of the value of the property that you (the policyholder) are required to insure, typically 80, 90 or 100 percent. By insuring your property by less than 100%, yes you can potentially lower your premium, but in the event of a loss you are diminishing your recoverable amount by that same percentage.

Let’s say that you have a location that you believe would cost $1.6 M to replace and have a coinsurance clause of 80% in your policy. Your reported value to the insurance carrier is $1.6 million. In the event of a fire loss, your insurance company subsequently determines that the replacement cost of your building is actually $2.5M, you will only collect 80% of $2.5M, or $2M. In addition to your deductible or retention, you will have to bear the outstanding $500,000.

Many policies use different coverage language and definitions from the standard ISO documents. However, most policies require there to be some sort of physical damage (fire, wind, etc.) for BI to apply. In the construction industry, coverage such as Builders Risk or Force Majeure insurance can provide different levels of coverage at various stages of a build project. Coverage can encompass delays as well as termination of a contract.

Incorrect or outdated valuations can lead to uninsured or underinsured exposures and overpayment of premium. We suggest you start reviewing your assets and coverage at least 180 days prior to your anniversary date to give yourself plenty of time to make the appropriate changes and ensure that you have adequate levels of coverage.