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Evaluating your property insurance.

It has been our experience that the only time anyone besides an insurance agent actually examines a property insurance policy is after a claim has been filed. Then, it becomes a finger pointing contest as to whose responsibility it was to make certain that the policyholder is adequately insured.

Since the major goal of purchasing insurance is to protect your assets and earning power, it is important to purchase only the coverage you need, and then evaluate that decision periodically to insure that your policy is keeping pace with your company's growth and assets.

This convenient, easy-to-understand checklist will take you, your insurance broker, or your controller just a few moments to complete. Consider it a road-map in determining if there are any major gaps or limitations in your program at this time.

Cost coverage

Coinsurance. This particular clause should be deleted from your policies either through an agreed amount endorsement or stipulated value. Coinsurance is a potential penalty-it only benefits the insurer. Essentially, the insurer wants the values insured to accurately reflect the value of your building or rental income (business interruptions) and so forth. If these values change and you are under-insured, you will then face a penalty in the event of a loss.

Blanket values. This is a plus, generally. Try to blanket all buildings into one limit of coverage applied to all locations.

Do the same thing with your stock and equipment. This will produce more flexibility and reduce any limitations of value at any one location.

Replacement cost. The loss or damage of a building should be protected on a cost-new basis rather than under the actual cash-value basis, which would recognize some depreciation. This is a simple endorsement that is probably included in your current policy-be sure to verify. Fighting disaster

* Earthquake. Because earthquakes are inevitable, this coverage is not cheap, but it is available and premiums are reasonable. For example, some programs have $1 million protection available for a concrete tilt-up building with a premium of around 4,000 per year. A frame building of the same value would be a little over $2,000.

* Building ordinance coverage. For older buildings, substantial exposure results from a partial loss to the undamaged portion of the building that is required to be demolished and rebuilt bringing the building up to today's standards. The undamaged portion of the building is not covered under the standard policy. If building codes have changed-and most have-this important protection should be considered.

* Formerly known as increased cost of construction, contingent liability through operation of building codes, and demolition insurance, the building ordinance coverage incorporates all these exposures into one coverage part.

* Vacancy and unoccupancy. Many of the older forms excluded coverage after 30 to 60 days of vacancy. Most new policy forms now just restrict coverage by 15 percent, and exclude theft and vandalism. In any event, with the soft real estate market, there are many vacancy conditions that should be evaluated for their insurance implications.

* Electrical panels/off-premises power. Most insurance policies will not include electrical arcing or direct damage to main electrical apparatus. Today's main electrical panels can be worth 25,000 to $100,000 plus-so be sure your policy can be extended or add a boiler and machinery policy to protect the exposure. A side benefit is the insurer's inspection to help assure proper maintenance and care.

* Some businesses will be shut down for extended periods due to off-premises power outages. Evaluate whether you have this exposure and if insurance is the answer.

A second look

* Deductibles. Have at least a $1,000 deductible where the premium credit would equal 15 to 18 percent. If you can absorb more, do so. A 5,000 deductible would permit a small additional credit, but insurance should be for the major loss anyway.

Insurance should never be a maintenance agreement. Use it for unexpected higher losses only All larger commercial property premiums are subjectively adjusted, based on losses, so use the insurance for only the major ones.

Factors affecting the premiums. Most commercial buildings of 5,000 square feet or more are subject to individual rating by the Insurance Services Office (ISO). Based on the size of the building, the type of construction, the type of occupancy, and so forth, the rate is promulgated to reflect all exposures.

It is important to review this rate development (which you have access to through your insurance agent) to be sure that you are not subject to an unwarranted surcharge for a condition that may have existed or is mistakenly attributed to your operation. One example is Reflective Foil Insulation (RFI). Several years ago, the ISO added a surcharge of over 100 percent if a building had RFI insulation. The ISO has since reversed its position and will eliminate the surcharge upon request.

You can also control the cost through the use of safety equipment. These and other loss-reducing devices should be evaluated, including water flow alarms, burglar alarms, and so forth.

Extended period of indemnity. If you carry loss of rental income or business interruption insurance, this coverage ceases after the building has been restored. Realistically, it may take several months to regain a tenant or the income flow that has been lost. By adding the Extended Period of Indemnity endorsement for 90 to 180 days, you can protect yourself against this significant exposure to loss after your operations are back to normal.

* Special/all risk vs. named perils/basic or broad. The best forms include all risk or special with theft and water damage. The basic and broad are generally too limited and the premium savings are insignificant. If your building has sprinklers, all risk covers leakage except from an earthquake; however, this can be added.

Protection. In most cases, sprinklers are the most effective fire loss prevention measures. On the average, the sprinkler system will reduce your rates more than 75 percent. An alternative is a heat-detection system. This low-cost alternative to sprinklers provides 24-hour monitoring for fires and reduces your fire rate by 20 percent. These and other loss reduction/prevention techniques, including sprinkler water flow and burglar alarms, should be evaluated.

* Employee dishonesty. As a property owner or manager, it is important that you have fidelity bond coverage. One client operating a mini-storage warehouse suffered an 80,000 loss when a manager helped himself to a customer's property. There are countless ways to have employee dishonesty losses, and this is one way to transfer the risk to an insurance carrier at a very modest cost.


If you are considering alternative insurance quotations, be sure to interview the agent for his or her particular qualifications in your operation. Be sure that he or she represents, and has a sizable amount of business with, strong insurance carriers. Best's is a service that rates the strength of all property and casualty insurers in America. Ask about the company's rating.

You should never go to the marketplace each year. It disturbs the stability of a program, particularly when claims become an issue. Find an insurer and negotiate with it, but try to preserve that relationship and build on it.

This is not an exhaustive study, but this short review of your insurance will provide valuable insight into the effectiveness of your current program.

Rates and coverages quoted in this article reflect information available as of this date and pertain to the geographic region of Southern California. State information will vary according to region and insurance regulations governing those areas. Many brokers operate with a detailed audit form to review all exposures to loss. Test your agent or get a second opinion.

Frank G. Robitaille, CPCU, ARM[R] is president of Armstrong/Robitaille Insurance Services. He has served as president of Orange Empire Chapter of the Society of CPCU and the Insurance Brokers Society of Orange County. In 1989, he served as host chairman of the National CPCU Convention. Currently, he is a member of the Board of Governors for the Western Association of Insurance Brokers. Armstrong/Robitaille Insurance Services is a full-service insurance brokerage serving the business community of Southern California. The firm offers property and liability insurance, workers' compensation, employee benefits plans, and risk management services.
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Author:Robitaille, Frank G.
Publication:Journal of Property Management
Date:Nov 1, 1990
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