Insure This

How Much Coverage is Enough?

by Various Authors

Q. What happens when I file a claim only to find out my policy is not in force and discover I have no policy at all—nothing, nada. Can an insurance company cancel my policy for any reason? How can an insurance company do this?

A. There are several reasons an existing policy may be cancelled, all of which are clearly defined in the insuring contract. The good news is that any cancellation will always start with a Notice of Cancellation (NOC) sent to the name and address on the insured policy. This letter is considered proper notification. The NOC can be sent for any of the following reasons.

Nonpayment
The NOC for nonpayment can occur if you miss your payments. Typically you will receive several notices to pay and usually a follow-up call. However, if your billing address is incorrect, you will never receive the notice. Make sure your address is correct on your policies, and you are prompt with your payments. Carriers will cancel for nonpayment.

Results of Inspection
The NOC from an inspection report should be taken very seriously and resolved in a timely manner (inspections are used to verify property type, reduce fire hazards and eliminate liabilities). A typical letter (known as a REC DUE letter) will state the specific concerns of an inspector. If the letter seems inaccurate or is just financially unbearable, discuss the matter with your broker, for there may be a way to work with the carrier. If you do not respond, your policy will be cancelled due to noncompliance and you will not be covered.

Change in Condition
One of the most common reasons that an insurance company may void or reduce its coverage of a property is a change in condition. Most policies (insuring contracts) have conditions in which they will cover the property per the policy you paid for. In the event your property goes beyond these conditions, the insuring contract will not provide coverage. For example, if you vacate the building to remodel or convert to condos, there are three points that will trip some coverage clauses in a policy. The first one, a vacant building in a standard property policy, is big one. In some policies, vacancy is defined as less then 70% occupied. If your property is actually vacant or if you have too many vacancies, you may have reduced coverage or no coverage at all.

The second point occurs when buildings are undergoing construction. This increases the standard apartment risk greatly, and there may not be any provisions in the policy for this condition. A Course of Construction policy would need to be in place.

The third point, condo conversion, is a very complicated insurance issue in today's market because of the 10-year statute on condo-construction defects. The standard apartment program is not designed to cover this process and will not provide the coverage you need when you need it. (A tenancy-in-common conversion is less complicated on liabilities, but vacancies and construction/remodeling are still factors in coverage.) Please call your insurance agent or broker directly to discuss your conversion process to ensure you have the correct coverage for the Course of Construction, Owner/Contractors Liability and the evaluation of a WRAP policy (construction defects) to protect your interest through the 10-year liability you carry as a developer.

In summary, insurance companies want to keep your money; however they also want to carry the right type of risk. In the event they are going to cancel, you will receive the NOC, prior to the actual cancellation. The NOC will usually tell you what the insurance company is looking for—required payments, RECS DUE or even missing/updated information. To keep your coverage current and in place, the real focus for you should be to maintain good communication with your broker or agent. In the event you need to or would like to make some changes at your property, make sure you discuss this with your broker. He or she will advise you on the policy terms and how to ensure you are covered at all times.
– P.J. Tradelius

Q. How much coverage is enough?

A. The easiest way to make sure you have enough coverage is to get a policy with �guaranteed replacement cost.� This type of policy states that the insurance company will cover the costs of rebuilding the structure without regard to a specific limit of insurance. The company will base the pricing for your insurance on other factors such as style of construction and type of materials, along with the square footage and the number of units and location. Remember not to confuse replacement-cost coverage with guaranteed replacement cost. Almost all policies are based on replacement cost, but very few are guaranteed. The former merely means that there will not be depreciation, but only the coverage limit of what is stated on the policy. The latter means that there is no limit for replacement of the structure with one of like kind and quality.

Although the pure form of guaranteed-replacement cost disappeared after the Oakland fire, several programs remain that offer the equivalent by way of a very high building limit, which provides security in terms of having enough money to rebuild. My company currently uses three different programs, all underwritten by �A� rated national carriers that provide limits of $250 million, $300 million or $1 billion of building coverage per building and per occurrence. These are not annual maximums or shared limits as some of the older programs once had. Each of these programs actually provides coverage up to the stated limits for each occurrence of a loss; and the limits are fully reinstated after each loss, without regard to losses for other buildings in the program. The fact that these limits will never be reached for a single building makes them the virtual equivalent of guaranteed-replacement cost. Since the cost of these policies are not based on the amount of insurance, they are very competitive and often times less than the standard stated-amount policies. Specifically designed for apartment buildings, these programs can offer several other perks such as unlimited loss of rental income, boiler and machinery malfunctions, building ordinance coverage and high limits of umbrella liability.

If you choose to stay with an insurance carrier that offers standard stated-amount policies, then you need to understand the actual cost to rebuild. There are several factors used to estimate the replacement costs. The location of the building, even within the same city, can make a big difference. A building on Telegraph Hill, for example, is much more expensive to build than a building on flat land due to the extra cost of constructing the foundation and hauling materials.

The type of construction, even with the same materials, also makes a significant difference. A Queen Anne or Victorian with hardwood floors and considerable exterior detail would likely cost twice as much, literally, to build than a rectangular building built in 1962 with little or no detail or subfloor, even though both are standard-frame construction.

The number of units per square foot of building area is yet another factor. A 10,000 square-foot building with 20 studios costs considerably more per square foot than a 10,000 square-foot building with three flats. The reason is that each of these studios will have a bathroom and a kitchen, adding up to no less than 20 bathrooms and 20 kitchens, a significant contrast to perhaps 6 to 10 such installations in the same-size building with three flats. In addition, there are many more walls in these studios than in the larger more spacious flats.

Based upon my experience and surveying area contractors, the following figures apply for ground-up construction (remodeling or repairing the framework of an existing structure is much more expensive than starting from scratch):
The range can go higher or lower depending on many factors. I have seen homes in Woodside, costing upwards of $1,500 per square foot. But with a quick walk-through of your building, most insurance professionals or contractors could give you at least a reasonable estimate of replacement cost.

SF: Victorian or high-quality homes - $400 to $750 per sq. ft.
SF: Standard 1930s frame apartment buildings - $200 to $300 per sq. ft.
SF: 1960s-style, basic apartment buildings - $150 to $200 per sq. ft.
Central Valley: Standard 1970s-1980s construction - $100 per sq. ft.

In conclusion, I would say that clearly the safest way to ensure you have enough coverage is for you to purchase a policy with a �high limit replacement cost� (a guaranteed-replacement cost) and let the insurance company take the risk. If you choose to use one of the standard-type policies with a stated limit, just be sure to review it regularly.
– David Gordon

The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. Consult the advice of an insurance agent for any specific problem. P.J. Tradelius is with Commercial Coverage, 415-436-9800. David Gordon is with Gordon Associates Insurance Services, Inc., 877-877-7755. Copyright � 2005 by the San Francisco Apartment Magazine. All rights reserved.