Property insurance for building
owners, commercial and residential, can be quite expensive; or not so
expensive depending on geography, topography, operational and physical
characteristics of a building. Areas deemed "high catastrophe (cat)
risk" will find their costs higher than the norm.
How can you successfully
negotiate the best insurance terms? We have prepared a list of
what you need to consider. Adhering to these guidelines will
absolutely positively impact your insurance costs.
Many owners and investors have an early exit strategy and
are willing to take on risk based on the history in their particular area that
a CAT event will not occur while they own the facility or business.
Whether you are in it for the short or long haul, consideration must be
with respect to the integrity of the structure from different perspectives.
Design and Construction
Should your business model allow you to construct new facilities from
scratch, it is paramount to consider the real return on investment (ROI) on
whether to "build to code"; or "build to withstand a maximum probable loss ("MPL")",
i.e. "build to code plus" in your most critical areas.
On the front end your costs are higher; however, in the event of a
catastrophic ("CAT") loss
you will have the added assurance in knowing that your facility will
likely withstand physical damage and shutdown than otherwise; and with
less worry about losing market share to a competitor. The true costs of a
loss go far beyond the physical damage to buildings, contents and extra
expenses. Management and operational personnel time and attention to your
core business will have been impacted tremendously, perhaps changing your
business forever. While you may find a temporary or permanent location, all
covered by insurance; you can be sure that a competitor is waiting in the
wings for the opportunity to take advantage of your misfortune. Insurance
will never make your business whole again; and cannot protect you against
Many businesses retain an architect and set about designing a facility that
will accomplish all their immediate needs and future growth. More often than
not owners have the impression that the local building code was
intended to withstand a severe CAT event. It is almost
never the case. Your county and state building engineers cannot possibly
know how the shape, design and construction of your facility in various
combinations will weather a CAT event such as a hurricane, flood or
earthquake. These building code experts assemble readily available
information and apply their collective expertise to arrive at a "minimum" standard
to protect the majority in the event of an severe unforeseeable event, but not
necessarily a severe CAT event.
The acquisition of land; and the design, shape and construction of your
facility needs to take into consideration the surrounding third party exposures
and topography, as well; and the probable resulting contingent events that will occur
in the wake of a CAT event. If you are in wind CAT prone area such as in Florida, you
need to consider building beyond the Florida Building Code
(FBC). While the FBC has one of the best wind code criteria in the country;
history has proven building codes, even those updated, inadequate for many
Design and engineering for a flood MPL is often overlooked. Again, building
to code does not suffice in the wind prone areas of the coastal regions. The
flood elevation maps and historical statistics are inadequate; and relying
on code is a disaster waiting to happen. Facilities need to be built
in excess of code and available flood maps whenever possible. It is only a
matter of time before a CAT event such as a Category 5 hurricane in tandem
with a violent rain storm produces CAT flooding. The overwhelming majority
of newer buildings will be severely impacted.
During the course of construction, every aspect of the construction phase
should be photographed, in exacting detail. The architect, contractor
and owner should all photograph; with the owner retaining permanent copies
for their own records. These images will help you better negotiate
your claims to adjusters. Plans should be duplicated and stored offsite in a
data warehouse or at the very least on some form of digital storage in a
secure and battle tested vault. By battled tested we mean, the storage
facility can withstand a violent CAT event, substantially above the flood
tables, fire resistant, quake resistant, in the center of the storage
facility. You need to be as comfortable with the offsite storage
construction as you are of your own facility. Consider fire perils just as
you would wind, flood or earthquake risk.
Strongly consider the construction, design and positioning of exterior or
free standing structures such as expensive signs. In the event of a severe
event, the overwhelming majority of incidental free standing structures will
be totaled. Many signs cost upwards of seven figures, due to their
complexity. If these are custom designed and due to their unique
design critical to the business, you need plans or a mold made of them well
in advance. You should have an agreement in place to reproduce these
and ideally from a source that would not have likely been impacted by the
event. Strongly consider designing your signs so that they can be
lowered, shuttered or even removed in advance. Make sure you have an
agreement in advance with a licensed and insured third party maintenance
firm that can assist in rapid installation. Insuring signs increases the
deductible threshold on the entire insurable risk in the event of a loss.
Prevention and Pre-event planning for a Cat Event
Debris from third parties is one of the leading contributors to massive
property damage. This includes neighboring facilities or development in your
area that present an immediate risk. Speak with the owners of these
facilities to make sure the have a plan in place to remove or control any
exposures from entering your area. Having good relations with your
neighbors will go a long way towards mitigating your loss.
Impact windows need to be shuttered up in advance of
hurricanes. Impact windows alone will not weather many severe hurricanes.
Your investment in shutters which exceed the wind loads of impact windows
will go a long way in protecting your structure. You should have an agreement in place with a third party firm to
assist you. Your employees may have their hands full. Nothing is more
assuring than knowing you have additional assistance in waiting.
You should designate employee teams working in shifts well in advance of CAT
events. Your employees will likely have to tend to securing their own
properties, families and relatives. Many leave town. It is just as important
that you offer personal CAT planning for your employee teams that are
working the CAT preparation shifts. To pull this off successfully, you need
to put their mind at ease.
Generators should power your most critical needs and beyond. You should have
a third party firm under contract to supply parts, service and expertise;
throughout any down time from a CAT event. Carefully consideration should be
made in this selection. Does this firm have their own business continuity
plan in place so that they can manage their risks and respond to your needs?
Preparing for the insurance underwriting process.
First, we'll make this comment. Underwriters do not want to hear you
say your facility is built to code. That would not be speaking with
you or your agent if it was not. If you want to make the "A" list,
which underwriters put top priority on, you need to be at Code+.
Insurance underwriters need to have detailed information
on the construction, design and neighboring areas. Property insurance
carriers use a process called C.O.P.E. to assess much the risk they are
considering to insure. Underwriters base their rates, deductible,
coverage terms and willingness to accept the risk based upon COPE.
Frame - combustible construction-any building
where more than 33% combustible wall construction is frame
Joisted Masonry - masonry supported walls with combustible floors
Noncombustible - steel frame building with non-combustible
construction (usually metal panel) walls and roof deck
Masonry Noncombustible - supporting masonry walls with steel roof or
concrete floors supported by unprotected steel bar joist
Fire Resistive - Concrete or masonry supporting structure with
protected steel and concrete floors and roof
Underwriters classify the occupancy by the
Insurance Services Office ("ISO") Commercial Lines Manual
classification table which ultimately determines rates. Beyond
effect on pricing, the UW will examine occupancy hazards such as
common hazards of heating and electrical to special hazards such as
flammable liquids, cooking, weldings, etc.
Split Protection classes give two grades per
municipality, one for buildings less than 1,000 ft to a hydrant and
one for all others. Beyond the ISO protection grades, the
underwriter will examine sprinkler systems, smoke alarms,
extinguishers, fire walls and doors, plus more.
Underwriters consider the condition of exposing
property as fire can spread from building to building. Construction,
distance and protection are key considerations. Underwriters will
consider frame and joisted masonry buildings closer than 50 ft as on
a risk to set line limits and reinsurance.
Underwriters will require detailed historical loss
information about the property. Producing what is know as "hard copy"
loss runs from the past insurers is required. There was a day
when underwriters took you at your word, however, those days are in the
Underwriters need to know the operational experience of
the management team. They need to see your business continuity plan.
Underwriters will need to discuss the financial condition of your company.
Do you have the financial capacity to invest in the proper maintenance of
the facility? Do you have reserves on hand to protect your property in
the wake of a CAT event, or are you holding on by a thread? Credit ratings
are equally important. Consider updating your Dun & Bradstreet or
similar rating. Some insurers will not consider you if you do not meet
a certain credit rating. Many businesses do not want to divulge their
financial information to D&B or the insurer. If you feel
uncomfortable releasing financial information to an intermediary, then it
can be submitted directly to the underwriter.
Underwriters do not want to see their prospective insured
involved in continuous litigation. If this is the nature of your
business, it needs to be communicated to the underwriter.
You have heard the expression "a picture paints a thousand words", well this
sums it up for underwriters. Nothing is more assuring to an underwriting
than being able to see what they are insuring or reinsuring. Being able to
produce detailed images throughout the construction process; in tandem with
current photos and surrounding areas, is even more reassuring. In this
day of digital information, underwriters can use satellite images of your
facilities; however, these are typically old images which cannot be relied
At the very least, design and
construction plans should be readily available, contact information for the professionals who designed
and built the facility from the architect, civil, mechanical and structural
engineers; GC, roofing contractor; including all critical trades plus all
means and methods. You should be able to produce written documentation on
which specific building code and version the facility was built to.
Having a copy of the CO or building permit provides little comfort.
There are many additional factors that go into the
process. These are just some.
Setting Property Limits:
Market appraisals of your property are a good start when
followed up with a full professional replacement valuation by a
Business Interruption coverage
Business Interruption is an often misunderstood coverage.
Too often organizations do not devote enough thought on the front end when
arriving at an adequate valuation for their business income exposure. This
can often lead to claim payments which do not meet the financial objectives
of the business
following a loss.
Setting limits do not begin with increasing last years limits by your
overall budget growth. This leads to inadequate and/or inaccurate figures
and insufficient coverage or just as bad, overpaid premiums. Taking numbers
straight off the balance sheet are also of little value when a CAT loss
occurs. If errors are identified by your carriers, you'll find adjusters
considering denying coverage or restricting the amount of recovery for extra
expense, rental values, ordinary payroll, etc... Knowing what your real exposure is on the
front end not only helps you following a loss, but often reduces your
Standard Business Income coverage is designed to cover the actual loss of
income incurred if normal business operations are disrupted by damage to
your property. Contingent business income coverage, indirect or
consequential, should always be considered. This type of coverage is not
standard to business income policies and must be specifically endorsed onto
the policy. These losses include interruption of utility services, inability
of customers/vendors to reach your facility, or even critical supplier
having suffered significant damage. Interruption by Civil or Military
Authority coverage is for losses suffered when a covered loss restricts
access to your property by order or action of civil or military authority.
Ingress/Egress coverage is for losses suffered when, a covered loss
restricts entry to or exit from your property.
Examine your policy for any "waiting period" which can be be 24 hours to 7
days with larger risks; and perhaps more before a loss will be paid. For many
businesses, this is the timeframe where you suffer your greatest loss. Some
waiting periods can be negotiated on a fixed dollar amount. An Extended
Period of Indemnity should be considered for those structures or businesses
that will not be back up and running full steam when your doors open,
without it your loss may not be paid. After a CAT event, expect your business to
take much longer to get back up and running.
Extra Expense Insurance is an important element of business income coverage.
These are the additional expenses that your business incurs from having to
move your business as a result of damage to your facility. This must be
endorsed onto the policy.
Many policies include co-insurance clauses that are a penalty for carrying a
specific limit that is less than the minimum percentage of value required by
the policy. We recommend seeking a waiver here when possible, which is often
the case on larger property values.
Loss management plan: After a loss and before substantive meetings with the
insurer, we help clients develop detailed loss management plans. The
objective is to identify the scope of the damages under the relevant parts
of the insurance policy.
will provide clients with significant support pre-event,
during and post-event. We will provide claim preparation assistance in
conjunction with your agent and adjuster, so that claims are expedited and
maximum recovery is reached.
We have the expertise
to design and negotiate the most competitive property insurance program.
Property insurance in the coastal regions have been hit hardest with
substantial premium increases and ever increasing deductibles. It is
critically important to be able to determine a fair estimate of your
probable maximum loss in the event of a cat event such as a
hurricane. We will be help you
arrive at comfortable retentions both financially and operationally.