Insuring to Value: Is Your Commercial Property Adequately Insured?

    Your commercial property is an extremely valuable and important asset. This property is most likely the operating center of your business or the businesses of your tenants. Thus, there is no question that insuring your property is necessary to limit risk and provide peace of mind in the event of a loss. With the appropriate amount of commercial property insurance, you know that the building you use, your revenue streams, and your ability to remain competitive will all be protected.

    But how do you know that you do in fact have the right insurance policy, more specifically, the right amount of insurance coverage for your asset?

    The fact of the matter is that many commercial properties are simply not insuring their assets to an adequate amount. If you are unsure whether you are fully insured, consider the following:

    • On average, contractors in Canada are pricing new non-residential builds 2.7% higher than just last year
    • Construction cost per square foot of an average commercial office building in Canada went from $248 in 2017 to $255 in 2018
    • In the first quarter of 2018 alone, construction cost on average rose 1.4% for new industrial buildings
    • Disruption in Canada-US trade relations are expected to drastically affect lumber and steel costs in Canada

    There are two cases to consider regarding inaccurate insurance coverage:

    Excessive Coverage

    Over insuring will certainly provide you with security in the case of a loss, but the premiums paid out to your insurer will be unnecessarily high. This scenario is certainly less common than the alternative.

    Inadequate Coverage

    In 2008 the Canadian Underwriter estimated that 60% of commercial buildings are undervalued by 40%. Under-insuring your property will put you in a position of significant risk as you are at jeopardy of not receiving full value for your property if you ever experience a loss. Having the appropriate amount of coverage is essential to recovering from any significant loss, limiting the downtime of your business, and remaining competitive. Many think of worst case scenarios – the total loss – and attribute a very low probability to such an event. However, under-insuring your asset will negatively affect you even in the event of a partial loss. Many insurers will apply coinsurance clauses and portion the claim to the total insured amount.

    Take for example a building that has insurance of $10,000,000 but the actual replacement cost is $11,000,000, a 10% difference. A partial loss takes place, costing $500,000 to which the insurer then pays out only $450,000, a 10% differential as determined by the condition of average based on total insured amount. Due to a lack of sufficient insurance on the property, you could be held personally liable for the remaining $50,000.

    Why is underinsuring commercial property so common?

    There are many considerations and possible mistakes that can take place when estimating the replacement value of a commercial property.

    • Failing to include all items of common property
    • Inaccurately determining demolition and removal costs.
    • Calculating the value based on market valuations, purchase price, original construction cost, etc.
    • Ignoring building code changes or bylaw changes that would affect the cost to rebuild

    For an in-depth article related to the above, visit this post by Tim Rogers.

    In short, there are a multitude of reasons for under-insuring. The most prominent being the lack of an expert appraisal from an accredited professional third party. At Normac, we have been completing insurance appraisals for over 20 years. Across Canada, we are trusted by commercial property owners and managers to assess and report on their properties’ total insurable value. If you are interested in having your commercial property appraised to ensure that you are sufficiently insured and protected, reach out to us HERE for a no-obligation quote. We promise you will receive an accurate appraisal, with the highest level of quality and service.

    Sources: Canadian Underwriter, Altus Cost Guides 2017 & 2018, Stats Canada.