Avoiding the Pitfalls of Property Undervaluation: Five Steps to Ensure Your Business or Home is Covered

More and more frequently, business owners and homeowners across the United States are falling victim to the issue of property undervaluation.

According to industry data, more than 60 percent of homes in the U.S. are undervalued by an average of 17 percent, and over 70 percent of commercial buildings are undervalued by 15 percent or more.

The lack of appropriate coverage due to undervaluation can lead to excessive out-of-pocket costs to repair or replace damaged property,  which could cause disastrous financial situations for business and home owners.

So the question presents itself, how did this happen?

More importantly, how do we make sure we are properly protected?

The root cause of national undervaluation traces back to two primary causes: inflation/rising costs of construction and lack of reevaluation by the agent and policyholder.

Inflation and Rising Costs of Construction

Construction costs have risen in recent years for lumber, steel and aluminum, in an attempt to promote domestic purchasing by increasing importation tariffs.

The results have inflated the already increasing costs of construction, with lumber prices increasing 24 percent and concrete prices rising 11 percent over the past five years (see graphs below).

Labor costs for construction have also been on the rise. The demand for workers has increased  69 percent since 2012  and wages have increased annually by roughly 4 percent. As such, the financial cost of trying to repair a damaged building has never been more expensive—which highlights the need for appropriate property insurance.

The chart below highlights a building valued at $1,000,000 at the beginning of 2010 (blue line), and the resulting value of the building at the end of 2017.

As shown above, a building valued in 2010 at $1,000,000 now has a replacement cost in 2017 on average of $1,365,528.

Experts also predict that by 2022 we will see an average increase of 3 to 4 percent on building costs. At a 4 percent increase, the building valued at $1,000,000 in 2010 would average $1,597,475 in 2022 (seen above, orange line).

This inflation of construction costs has been increasing at a rapid pace, and has caused a majority of corporate offices to be uninsured—especially when 2017 presented us with the worst year for property losses in U.S. history ($143 billion total).

Ultimately, accurate property values are crucial to receiving reliable coverage.

 

Many business owners believe that property insurance premiums won’t increase unless you suffer a loss, which is a big misconception.

 

Lack of Reevaluation by the Agent and Policyholder

One of the origins of property undervaluation is the complacency of agents and policyholders who renew old policies with no reevaluation.

Many business owners believe that property insurance premiums won’t increase unless you suffer a loss, which is a big misconception.

Property insurance can become more expensive based on the price increases stated above, which in turn increases the building’s replacement cost.

If you were to have proper coverage for your $1,000,000 property in 2012 and the property rose to $1,515,800 (as described above), the consequences of never adjusting your property premium would be catastrophic if a claim were to occur.

For example: if you were to have a $500,000 claim and did not have an agreed value endorsement in your policy, only $329,858 would be covered by the insurance company—meaning you would owe $170,142 out of pocket. Obviously, a significant financial impact to any company.

The good news is that it’s avoidable. First, sit down with your agent and reevaluate your policy plan and identify gaps in your coverage.

Once completed, here are five steps to getting proper coverage on your property insurance:

  • Get a formal replacement cost appraisal of your building. Repeat this process every three years with a responsible appraiser you trust.
  • Create a detailed inventory of your organization’s assets. Provide all details possible, including pictures, videos and a record of the valuation of all contents.
  • Consider adding an annual inflation endorsement to your policy, which can ensure your policies will be on pace with inflation.
  • Add a blanket endorsement and/or Agreed Value Clause to your policy, which waives any co-insurance requirements.
  • Conduct a review of all coverage, exposures, and sublimits with your agent so you both are on the same page as to what is covered, and to what extent.

Ultimately, a loss isn’t the way to discover inadequate limits for property coverage. Take a few proactive steps today to ensure you have the right coverage—and spend less time worrying about what could happen to your home or business tomorrow.

If you have any questions about this article or this topic in general, please don’t hesitate to contact me.

 

Great American Insurance Group provided information included in this article.


Craig Myers

About Craig Myers

Craig Myers empowers his clients with strategic insurance resources and high-touch guidance on managing and mitigating risk. By providing a range of Property & Casualty solutions—including safety programs and claims management—Craig is able to help organization’s address their specific challenges and ensure the success and growth of their business. In his role, Craig is focused on the unique challenges currently facing clients in education, finance, tech and entertainment.

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