Can an Insurance Carrier Force you to Raise the Building Value on your Insurance Policy?
As a property owner, it is essential to understand the importance of insurance and the factors that can affect your coverage. One of the critical aspects of property insurance is the value of the property being insured, which is usually referred to as the building value. The building value is the estimated cost of rebuilding your property in case of a total loss, and it is used to determine the amount of insurance coverage you need.
Insurance companies rely on building values to calculate premiums, and it is common for them to review the values periodically to ensure they are up to date.
Sometimes, your insurance carrier may require you to raise your building values, and you might wonder if they can do so legally. The answer is yes.
Insurance carriers have the right to ask you to increase your building values to ensure that your property is adequately insured. This requirement is not a form of punishment or a way for the insurance company to increase premiums. It is a proactive measure to protect you, the property owner, from underinsurance and potential financial losses.
Here are some reasons why your insurance carrier might ask you to increase your building values:
Inflation: Building values can increase due to inflation. As construction materials and labor cost increases, the cost of rebuilding your property also increases.
Renovations and Upgrades: If you have made significant improvements to your property, such as adding a new wing, upgrading the HVAC system, or installing expensive fixtures, your building values will likely increase.
Building Code Changes: Building codes are constantly changing, and new regulations may require you to make updates or improvements to your property therefore the rebuild cost on the property may change, requiring an update to your insurance.
New Valuation Methods: Insurance companies may periodically update their valuation methods to reflect changes in the industry requiring a shift in your policy.
Not updating your commercial building values could have significant financial risks: Co-Insurance Penalty.
When it comes to commercial property insurance, co-insurance is a term that refers to the percentage of the property’s total value that must be insured to ensure adequate coverage in case of a loss event. The co-insurance penalty is a clause that comes into play when the policyholder fails to meet the co-insurance requirement, resulting in a reduction of the insurance payout in case of a loss.
If your commercial building is underinsured, meaning that the insurance coverage is less than the required percentage of the property’s total value, you may face a co-insurance penalty. The co-insurance penalty is designed to incentivize policyholders to insure their properties adequately, as underinsurance can lead to significant financial losses in case of a loss event.
The co-insurance penalty is calculated based on the percentage of the property’s total value that was insured. For example, if your policy has an 80% co-insurance requirement, and you only insured the property for 60% of its total value, you are underinsured by 20%. In this case, the co-insurance penalty would apply, and the same percentage of the loss would reduce the insurance payout. So, if you suffered a loss of $100,000, your insurance payout would be reduced by 20%, leaving you with only $80,000.
It is important to note that the co-insurance penalty can be costly and result in significant financial losses for policyholders who fail to meet the co-insurance requirements. To avoid the co-insurance penalty, policyholders should ensure that their insurance coverage meets or exceeds the co-insurance requirement. This means that the amount of insurance coverage should be equal to or greater than the required percentage of the property’s total value.
This valuation should consider the cost of rebuilding or replacing the property in case of a total loss, including construction costs, building materials, labor, and other expenses. To determine the appropriate amount of insurance coverage, contact Power Risk Management and speak to one of our licensed insurance brokers at one of our three convenient locations:
Chicago Office: 5343 W. Devon Avenue, Chicago, Illinois 60646 | 773-273-8777
Bourbonnais Office: 1410 Argyle Ln N, Bourbonnais, IL 60914 | 815-922-4754
Denver Office: 1400 16th Street, Suite 400, Denver, Colorado 80202 | 720-779-1190