u

Underinsured?

REPRINT FROM THE INTEGRAL NEWSLETTER

The following statistics have been repeated year after year, and we have seen it first hand as a loss consultant over the past 25 years or so.

  • One out of three buildings will suffer a loss directly or indirectly within the next five years as the general statistics indicate.
  • They also revealed that a property loss to a building every 5 years.

Studies over the last 10 years have revealed the following;

 

  • 64% of all HOMEOWNER policies are still undervalued by at least 27% to be adequately protected.
  • 75% of all COMMERCIAL BUILDINGS are still undervalued by at least 40% to be adequately protected.
  • 80% of all CONTENTS, FIXTURES, & EQUIPMENT are still undervalued by at least 60% to be adequately protected.

 

So as a FORENSIC RESTORATION ANALYST, we asked why? What are the expenses involved that constitute a loss and directly affect the cost of the claim? How is an appraisal for Replacement Cost arrived at? What costs are missed? And what limit should be on the policy to prevent this shortfall from happening?

 

Here is what we found. The cost of the claim to rebuild with like kind and quality on the same site consists of the following areas.

 

REPLACEMENT COST VALUE is the cost to rebuild the building from scratch – new. There are several good methods of finding this value through software programs and real estate appraisals but they do not go far enough. They stop there. Here are the rest of the costs.

 

Shortfall # 1 – BYLAW & CODE UPGRADE COSTS this is usually a percentage in a packaged homeowner’s policy or in blanket form for a commercial policy, but the additional cost of this expense is not considered when determining the Replacement Cost Value to begin with. Building Code Changes – Older buildings, and many newer buildings, were built during times when building codes were less strict than they are today. If you are rebuilding or restoring a building, you may need to meet the newer and more demanding building codes. Even undamaged parts of the structure may have to be rewired or plumbed to meet current codes. Building codes may also require you to replace windows with safety glass or replace roofs with fire-retardant materials. Building code changes can add thousands of dollars to the cost of restoring a damaged building. Dangerous materials can also lurk in these buildings which can render them obsolete.

Shortfall # 2 – DEMOLITION & DEBRIS REMOVAL & ABATEMENT COSTS New building construction normally begins on open ground, perhaps with some brush removal, grading or other minor site preparation. Rebuilding begins with a partially or totally destroyed structure occupying the building site. Parts of the structure may still be standing but are unusable, requiring demolition and removal. Mold or Asbestos may be present. Detailed structural drying may be required. The site may have to be extensively cleaned, after an intense fire for example, the soil may be contaminated. The foundation may have been damaged beyond repair. A lot of work is usually required before the first cement can be poured or the first nail hammered in.

Undamaged Parts of the Building and the Contents must be protected – Once the fire is out or the windstorm has abated, all parts of the property not destroyed must be protected from further damage or looting. This can involve covering a roof, missing windows, and holes in the walls, with plastic sheeting for example. As soon as possible, surviving personal property items must be removed and placed in temporary storage for safekeeping.

Access to the Worksite – When new buildings are under construction, there is usually no landscaping, allowing for easy access to the site. Materials can be driven directly up to any side of the structure as needed. When a building is being rebuilt next to existing buildings, there are trees, shrubs, lawns, flowerbeds, fences, and similar obstructions limiting access. Materials often have to be offloaded further away and hand-carried to where they are needed. This factor is compounded if the building site is on sloping ground. The impact on labour costs can be significant.

Satisfying the Policyholder – One of the most important service elements to a claim, is getting the insured back into their repaired building as soon as possible. Not only does this reduce the additional expenses part of the claim, but also it strengthens the relationship between insurer and policyholder, through the perception of good service commitment. This heightened “urgency” usually carries a higher cost in materials’ delivery fees and contractor fees. There is not the same pressure or expectation when constructing a NEW building as compared to a REBUILD.

Shortfall # 3 – CATASTROPHIC CONDITIONS COSTS Construction Costs Increase after Natural Disasters – In the wake of a natural disaster affecting a wide area, the costs of building materials and contractor fees nearly always rise sharply in response to the sudden surge in demand. Even without deliberate profiteering, this would normally be true because when local supplies are quickly exhausted, materials must be brought in on an emergency basis, often from mills or factories at great distance. This may require higher transportation costs, and a lot of overtime pay. Whenever many buildings have to be repaired or rebuilt at the same time, the cost for each will be higher than normal, sometime much higher.

The total of all the above FOUR values will form the REPRODUCTION COST VALUE and this is what the limit of the insurance policy for buildings should be.

2017 UPDATE: Two new recent changes to the building code has changed the playing field again. One being as recent as February of this year. Aside from a major introduction into the building code for “Green Buildings” in 2012 with implementation for effective dates over 10 years starting in 2015. On February 27, 2017, the National Research Council (NRC) announced it is poignant to update Canada’s building codes to reflect the realities of climate change.  In general building green affects residential construction by increasing costs by 20% and commercial construction by 8% in comparison to existing conventional construction today. GREEN TECHNOLOGIES and CLIMATE CHANGE are two different influences on buildings and are not the same.