If you are the building owner, in the process of buying your building or have a triple net lease making certain that you are properly insured will be very important. In some cases you may have a triple net lease where you are required to insure the building on behalf of the owner and list them as the loss payee. There are some very important considerations when insuring your building.
First, setting the valuation of the building for insurance purposes is very confusing. A lot of veterinarians confuse the retail value of their building with the insurance value or sometimes confuse the tax assessed value of their building with the insurance value. The insurance value is strictly what it would take to replace the building today with modern materials and labor.
Insurance agents work off of replacement cost value to determine the insurance value of the building.
Replacement cost is based on replacing your building the way it was originally built with modern materials and labor. For example If the building was originally constructed in 1937, replacement cost will attempt to rebuild the building using the same construction design. Replacement cost has been established by the courts through numerous cases to provide the repair and replacement of structures. If the building has plaster and wood lathe walls and ceilings replacement cost will replace with plaster and wood lathe walls and ceilings. This is one of the reasons that older buildings are more expensive to insure and replace.Each building has its own special design elements that make setting the replacement cost an individual effort.
You might ask yourself, if the insurance carrier is going to provide replacement cost value what does it matter how much I insure the building for? Say that it would take $500,000 to replace my building and that I insure it for $250,000 what will happen if the building is destroyed? The answer is $250,000, the building would be considered underinsured and would be subject to coinsurance penalty. In next week’s blog we will dig deeper into coinsurance and how it impacts the insurance coverage for your building. Suffice to say that coinsurance is the insurance carrier’s requirement that you will insure your building for full replacement cost value. If your building is not insured correctly for full value the insurance carrier will pay less than the full replacement cost at the time of loss. I will be describing how to avoid that and to make certain you are insured correctly.
So until next week then!