How much coverage is enough?

A guide to properly insuring your building to value

 

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.

 

There are 4 ways to buy building coverage: 

 

I. 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. 

 

A variation of “Guaranteed Replacement cost” which provides basically the same type of coverage through use of a very high building limit for any single loss “high limit package programs”. These programs typically have a limit of $750 million or $1 billion per occurrence and therin are essentially unlimited as well.  The high 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.  The cost of these policies is very competitive with policies affording more limited coverage. 

 

II.  EXTENDED REPLACEMENT COSTThis provision allows for some multiple of the base building limit to be available to cover a building loss.  For example a 125% extended replacement cost endorsement would provide for up to $1,250,000 of coverage to be available on a $1,000,000 base policy limit.   The basic requirement is that the building must be insured to 100% of the estimate replacement cost at the time of writing the policy based on industry cost guides, which are usually quite low.   Different companies may not offer it at all or may offer 125%, 150% or 200% extended replacement cost.  

 

III.  BLANKET LIMIT ACROSS MULTIPLE BUILDINGS – If you own multiple buildings that can be combined on one policy, this may be of great value.   Some companies are willing to write multiple locations on a single policy with a combined limit of coverage allowing for the total limit to be used for any one loss.  It is important to know that simply having the locations on one policy is not enough; the policy must specifically have the blanket limit endorsement which provides for a single limit rather than a schedule of limits for each location.  This is a great way to get a lot more bang for your buck in that usually, there is no extra charge for this valuable upgrade, but only a small number of our carriers offer it.   

 

IV:  STATED REPLACEMENT COST -  Unfortunately, most commercial policies have a stated limit which is the most they will pay for a building loss.   If you choose this option, then you need be very concerned with the actual cost to rebuild.  

 

How is minmum replacement cost established?

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

 

Type of construction, even with the same materials makes a significant difference.  A 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 though both are 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. 

 

 

 

 

 

 

 

 

 

 

 

 

 

The range can go higher or lower depending on many factors.  

 

In summary, the safest way to be sure you have enough coverage is by having the insurance company take that risk by either purchasing a policy with a guaranteed replacement cost, one that uses a blanket limit which includes all of your locations or at a minimum, one that includes extended replacement cost.   If you do choose to use one of the standard type policies with a stated limit, just be sure to review it regularly and consider getting multiple estimates of rebuild cost.  

 

 

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.

Gordon Insurance

20 El Camino Real

Redwood City, CA 94062

Main office: 650-654-5555
Toll free: 877-877-7755
Fax: 650-654-5550

Office Hours:

Mon: 8:00 AM - 5:00 PM
Tues: 8:00 AM - 5:00 PM
Wed: 8:00 AM - 5:00 PM
Thurs: 8:00 AM - 5:00 PM
Fri: 8:00 AM - 5:00 PM
Sat: Closed
Sun: Closed

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Testimonials

For over 20 years Dave Gordon and Associates have taken care of all my insurance needs. This includes insurance coverage on multiple types of commercial and residential properties some of which had complex insurance requirements. They have NEVER failed me. The staff is fantastic, assuming the role of liaison between banks, investors, and me to always provide required documents and the proper policy types at the best price without delay or hesitation. I can always count on Dave Gordon and Associates to resolve any issues and/or return my call or email within less than 24 hours! Dave Gordon and Associates is a testimonial to the professional, courteous, efficient, and knowledgeable service that should always be provided to clients . I have no reservations referring Dave Gordon as your "go to" Broker for all your insurance needs.
Marv Remmich, Realtor & Property Manger, Property Owner, Developer
I started with Dave Gordon in 1985, and have never looked back. He and his staff have been on the ball, always getting back to me in a day. I have my retail store in San Francisco and an apartment house with him. Every month I get a flyer in the mail, telling me about the great service and low price offered by others, and when I have followed up, the price was always higher and the answers slow to get. When I wanted to raise the coverage for "code upgrade" on the apartment house, to $250K he switched me to another carrier that included $500K in coverage at a cost of $120. a year more. That is looking out for the Client. His outfit is the best.
Ed Regan Business and Property Owner
I have 4 properties, an auto and a $5 Million umbrella insurance policy that I had been doing business with another insurance co. When it came time to renew these policies, for the first time I decided to compare the coverages and the premium rates being charged by a very large & well-known nation wide insurance company. I was absolutely flabbergasted when I made my comparison sheet with Gordon Insurance Co. & the other 4 insurance company quotes. Gordon was lower than all 4 companies and I also was very impressed by the way the owner David & his staff treated me during this process. They are very attentive, detailed, courteous & say what they mean, & mean what they say & get the job done. I am going on 3 years in doing business with Gordon Ins. Co. & do not plan on switching companies, since I have been so satisfied with their service across the board in each department. I strongly recommend Gordon Insurance to you & give them my 5 STAR RATING! Suggestion: Gather 3-5 insurance quotes from different companies. Then call Gordon Ins. Co. and they will give you their quotes. In comparing these quotes, you will be amazed at how reasonable Gordon's rates are! They use top grade insurance companies - not unknown, fly-by-night companies that do not stand behind their insured customers! Like me, you also will be very satisfied with Gordon's rates & service for years to come! Try them - You will like them also!!
Peter Kelsch Investment Property Owner San Francisco
I first met Dave Gordon about 20 years ago (!) when I had a retail printing shop near his insurance office. He needed printing for his business and I needed insurance for my business, my home and my cars. I have been doing business with Dave and his company ever since, and I have never had any reason to even consider switching my insurance business to anyone else. Dave and his staff are knowledgeable about their business (and they do a great job of staying informed about their industry, which is constantly changing) and they are always super responsive to any of my inquiries and needs. Dave's company is one that I can always count on. Try them and I don't think you will be disappointed. Gordon Insurance delivers!
Carl Gosline TigerType Print & Design
Over the years, I have found David Gordon to be a professional who knows his business thoroughly and has been able to provide competitive insurance products for my commercial properties as well as my home and cars. In addition, Travelers Insurance came through to exceed my expectations of how an insurance company responds to claims after a substantial water damage claim at my home last year. I wouldn't hesitate to recommend Gordon Insurance to my friends and family.
F. William Mainzer Business and property owner
As HOA President for Bay Ridge Condominiums, I can confirm that we have been a satisfied client of Gordon Associates Insurance Services since 10/12/2002. I have had the pleasure of working with most of the staff and have found them to be dependable, hard-working and dedicated to providing me with the service and products that suit our association's needs. I'm happy to recommend Gordon Insurance for your insurance needs and would be open to providing further information if requested.
Kent R. Clark, president, Bay Ridge Condominiums, HOA
In addition, Travelers Insurance came through to exceed my expectations of how an insurance company responds to claims after a substantial water damage claim at my home last year. I wouldn't hesitate to recommend Gordon Insurance to my friends and family.”
F. William Mainzer, Business and property owner
I first met Dave Gordon about 20 years ago (!) when I had a retail printing shop near his insurance office. He needed printing for his business and I needed insurance for my business, my home and my cars. I have been doing business with Dave and his company ever since, and I have never had any reason to even consider switching my insurance business to anyone else. Dave and his staff are knowledgeable about their business (and they do a great job of staying informed about their industry, which is constantly changing) and they are always super responsive to any of my inquiries and needs. Dave's company is one that I can always count on. Try them and I don't think you will be disappointed. Gordon Insurance delivers!
Carl Gosline, TigerType Print & Design
I just want to say I have heard very good things about and your ethics in business. I was probably in the worst phase of my life when dealing with my insurance items with you and didn't care about much at the time. I feel better now and just want to thank you and appreciate your support. I have known you for a long time as a friend and I do not like business transactions in the first place. Hearing what I hear from various people is so nice and I feel you need to know that you are very well respected out there.
Julie G
I started with Dave Gordon in 1985, and have never looked back. He and his staff have been on the ball, always getting back to me in a day. I have my retail store in San Francisco and an apartment house with him. Every month I get a flyer in the mail, telling me about the great service and low price offered by others, and when I have followed up, the price was always higher and the answers slow to get. When I wanted to raise the coverage for "code upgrade" on the apartment house, to $250K he switched me to another carrier that included $500K in coverage at a cost of $120. a year more. That is looking out for the Client. His outfit is the best.
Ed Regan, Business and Property Owner