Risk management: insuring camp property.

Insuring camp property can present interesting challenges. Here are some of the issues to consider:

Value

How does a director determine the value of buildings at camp?

A director may make estimates of what things cost, based upon her own experience. However, we recommend that a director hire an appraiser to do independent analysis.

The appraisal presents values based upon construction cost guidelines compiled by companies specializing in this service. It usually includes an inspection of the property, a diagram of the premises showing the location of all structures, and photographs. If you should ever suffer a loss of your property, this information will provide evidence of the building value and speed up the settlement process.

Generally, real property (building) appraisals establish the actual cash value and the replacement value of the property at the time of the inspection.

What is actual cash value insurance?

This is a common insurance term. Basically, actual cash value is determined by establishing the replacement value of the building and subtracting depreciation.

Depreciation, in the insurance sense, is a dollar amoung, expressed as percentage. It adjusts the replacement cost based upon age and wear and tear on the building. It should not be confused with the use of the term depreciation in accounting. They have very different meanings. Renovation and and a systematic maintenance plan will lessen the depreciation of camp buildings.

What is replacement cost insurance?

Replacement cost insurance is defined as the cost to replace and/or repair the building with materials of like kind and quality following a loss. In effect, when you insure your buildingss for replacement cost, the insurance company agrees to pay you the cost of constructing the building today, without deduction for depreciation.

Which costs more?

Replacement cost property insurance costs more than actual cash value insurance. However, the increased cost is due to the additional insurance that must be purchased for the difference between replacement values and depreciated values.

Some Strategies

We think buying replacement cost insurance makes the most sense today. While it is hard to find additional money in the budget these days, keep in mind one of the fundamental principles of risk management: "Don't risk a lot for a little."

If fire insurance cost one dollar for every $100 of insurance, then increasing one's coverage by $200,000 would cost $2,000. However, if one opts for actual cash value insurance and a fire occurs, one would instead need to borrow $200,000 to cover the true cost or replacing one's facilities. Suppose that money is borrowed today at 7 percent; the first year's interest alone would be $14,000 Over a typical 20-year term for a conventional s mortgage, this interest expense would require a payback of nearly one and one half times the amount borrowed, or $300,000.

Transferring the risk of replacement cost in this example is clearly the decision to make. We encourage you to do your own analysis after the summer. Enlist the help of your agent or broker. You may find that the cost to increase your property insurance to replacement cost has an even better payback than this example.

Other Approaches

Some directors approach this issue of replacement cost versus actual cash value differently. Instead of buying full replacement cost coverage on all buildings, they insure only their key buildings for replacement cost. Examples would be the dining hall, recreation building, or other buildings critical to the operation of camp. The director or owner assumes the risk of replacement cost on the other structures. This can be a very effective use of limited resources.

One of the challenges in camp property insurance is determining appropriate protection for some of the buildings that are truly unique. Some buildings at camps, especially dining halls, are made from materials that are no longer readily available. The insurance industry has tried to reponse to this situation by developing a "functional replacement cost" endorsement. We have investigated that coverage and find that we cannot recommend it at this time. There are too many questions on valuation left unresolved.

Coverage

Once you've determined the values for which yoou will insure your facilities, you must decide what perils to insure against. There are three levels of protection, known as basic, broad, and special causes of loss. These news terms have replaced the more familiar named perils, broad, and all-risk policy forms.

Some companies, like Markel Rhulen, have developed specialized property insurance coverage forms that offer broader protection for camps. You should know what coverage you carry and determine if it has been computerized for camps. When insurers have developed specialized coverage, cost comparisons must also consider that value added by the broader coverage terms. Some investigation before you buy the coverage can pay big dividends if you have a claim.

Other Considerations

Other issues which bear investigation include coverages for the costs of construction required by changes in local laws after your camps was built. These laws might require you to demolish a building if it was more than 50 percent damaged, for example. Or, you may be required to install handicapped bathrooms in a building after a fire.

Generally, the rural townships in which most camps are located do not have stringent regulations in this regard. However, the need and cost of this optional coverage bear investigation.

In summary, insuring camp property requires some thought and investigation. Not all property insurance is the same. Enlist the support of your agent or broker in your analysis. And remember, don't risk a lot for a little.