It’s Time to Reevaluate Your Existing Property Insurance Coverage

By Chip Stuart, Chief Sales Officer, Hub International

The new wave of challenges facing the global economy in 2022 such as inflation, continued supply chain delays, and labor shortages has caused property values to rise, along with the cost of construction.

In commercial real estate, the impact of these disruptions is mostly felt in new construction, leaving owners of existing assets likely to benefit from shifting demand. Coupled with rising occupancy, seniors housing property owners could see historically high revenue growth in 2022.

On the other side of the coin, however, is higher insurance rates for just about all types of properties.

If property owners aren’t careful, they could see themselves underinsured and at high risk for loss in the case of an event. Owners looking at new construction have even greater considerations to manage, with material and labor shortages causing construction delays that could impact existing coverage.

For example, when extending existing construction insurance from 18 to 24 months due to a construction delay, the insurance coverage starts from the original construction start date. But there is now a structure on what was once a plot of land. Insurance needs to cover not just construction delays, but the building itself.

Another economic pressure is inflation. High inflation increases both the replacement cost of the building and a rental income associated with the housing. Both the replacement cost of the facility and the business interruption of the revenue needs to be updated before the insurance renews annually.

Here are recommendations when reevaluating existing property coverage:

1. Opt for the higher premium: Co-insurance clauses in property policies state that the insurance company agrees to replace damaged buildings. But, if the real estate owner doesn’t insure their properties to the full amount, it makes the building owner a “co-insurer” and liable for as much as 20 percent of the costs. This occurs when the loan did not account for delays or inflation. Inflation results in increased replacement costs, such as that of materials and labor. Should the higher premium not be an option, then consider using a sub-limit for your policy limit. A sub-limit allows you to insure at full replacement cost but with less insurance, saving on premium costs.
2. Check your limits: While insurance contracts may have provisions for the increased cost of construction, it often only covers up a specific amount, which may not be enough. Older buildings will need higher limits. Newer buildings are more likely to meet current codes and need a small limit.
3. Consider blanket limits: Blanket limits cover numerous properties in a single portfolio and assumes the insured has a spread of risk because more than one location will not be subject to the same loss. Blanket limits let real estate owners cover a single claim in any location. Insuring at a value that’s higher than the largest property in a portfolio will cover the additional costs of replacement should a catastrophe or fire strike. Blanket limits cost more up front, but provide a cushion for the long term.
4. Request appraisers separate the value of the land and facility: An appraisal provides the most precise method to secure the amount of coverage necessary. By separating the value of the land and the facility, property owners or operators can exclude the land value from the coverage amount and only pay for covering the facility.
5. Increase your property insurance values: There is currently a rebound in the market and we anticipate a strong year for seniors housing occupancy recovery. However, if we’ve learned anything over the last two years, it’s that things can change quickly. It’s important to have coverage for loss of rent if demand should dip once again.

Property owners will want to regularly check their coverages to ensure replacement cost values take construction delays and inflation into account. Real estate owners and operators will also want to declare their annual rent correctly, even when it decreases — after all, real estate owners shouldn’t pay extra in premium for revenue or tenants they may not have.

James “Chip” Stuart is the corporate chief sales officer and practice leader for global insurance brokerage Hub International’s real estate specialty in North America.