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by Jim Nevins

It was a beautiful Saturday morning. The sun was shining, the birds were chirping and I thought I had a rare summer day that I could spend relaxing in the backyard by the pool or taking a nap in the hammock. Then I saw it: the paint was peeling around the windows, the gutters needed cleaning and the garden was becoming overgrown. I didn’t have a day to relax in the sun; I had a day of home maintenance ahead of me.

I was reminded of this day when I began to write this article because it dawned on me that we spend a great deal of time on maintenance. Whether it is changing our oil to keep our cars running smoothly or buying that 60-inch plasma TV because football season is around the corner, we are constantly maintaining and upgrading our lifestyle. Unfortunately, we often forget to maintain and upgrade one very important thing: insurance.

Regardless of whether it is a life insurance policy, an automobile policy or a home insurance policy, most people have no idea what they are insured for and what their insurance policy actually covers. As a licensed public insurance adjuster, I represent property owners and assist them in preparing, filing and negotiating their property damage claim. It never ceases to amaze me how many people neglect to maintain adequate coverage for their property and protect their interests.

Since apartment owners and property management companies are in business to make money, it is critical for you to stay on top of your insurance coverage–otherwise a fire or a flood could financially devastate your business. Let’s discuss some general insurance principles and some ways to “disaster proof” your policies.

Insurance Policies
First and foremost, know that your insurance policy is a binding contract between you and your insurance company. It spells out the responsibilities of both parties and is comprised of four basic parts: the declarations page, the insuring agreement, the conditions and the exclusions. There is no one-size-fits-all policy. Instead, each policy should be tailored to each of your properties by adding the appropriate endorsements.

There are two basic types of policies that can be purchased to insure your property: a replacement cost policy or an actual cash value policy. A replacement cost policy provides coverage for the cost of replacing your damaged property or structure with like kind and quality of new material. In other words, you get new for old with no penalty for depreciation. An actual cash value policy will pay you for the value of your property or structure at the time of loss, while taking into account its age and condition (this is determined by establishing its replacement cost value less an applicable depreciation or, if the property does not depreciate, fair market value at the time of loss). Obviously, most policyholders prefer to carry replacement cost coverage, when it is available to them, so that they won’t have to spend out of pocket in order to restore their properties after a loss.

Valuation
Now that you’ve decided on how to insure your property, the next question is “How much insurance do I need?” It is very important to remember that an appraisal value and a replacement cost figure are not the same thing. Let’s look at an example.

Last year, after purchasing a 10-building, 120-unit apartment complex, one of my clients suffered a very bad loss due to fire. Ten of the 12 units in one of his buildings were completely destroyed, and each building held a separate limit of liability. Unfortunately, he based his insurance coverage on an appraisal done at the time of purchase for his mortgage holder. He took his appraisal figure, subtracted the land value and divided that number by the 10 buildings he had on the property. He then assigned that figure as the limit of liability for each building. The result was that he was underinsured by almost $200,000 on each building.

A better way to value each building is to measure the square footage of the building and multiply that by the average cost of construction, per square foot, for your region. If you are unsure of local construction costs, contact your insurance agent, a local contractor or a licensed public insurance adjuster. There are also online reference applications available, like Marshall & Swift or RS Means.

Keep in mind that myriad factors will determine the construction cost per sq. ft. If you are insuring an A-plus property that includes upgraded carpets, deluxe trim packages, granite countertops and upgraded fixtures, you will want to adjust that sq. ft. cost to ensure proper coverage.

When you have figured out your building’s replacement cost values, you can either assign each building its proper limit of liability or have your policy written as a blanket, which is when the single face amount of the policy applies to two or more locations, two or more types of property, or a combination of locations and types of property.

Clauses and Endorsements
While there are many different clauses and endorsements that will affect your recovery from the insurance carrier, I believe that the most important are co-insurance and building code upgrades, also called building ordinance or law coverage.

Co-insurance can be a very confusing policy condition. If you have a co-insurance percentage listed on your declarations page, it means that you have agreed to insure that building or property to, at least, that designated percent of its replacement cost value (the designated percent is usually agreed upon by you and your insurer). For example, if you own a building with a replacement cost value of $100,000 and your stated co-insurance percentage is 80%, then you must carry at least $80,000 in coverage on that building. You will only be penalized during a claim if you fail to meet that requirement. If you sustain a $40,000 fire loss and you have adhered to carrying $80,000, you will receive a dollar-for-dollar reimbursement, or $40,000, less your deductible. If, however, in this same example, you are only carrying $60,000 in coverage, you will be penalized. Since you only carried 75% of the requirement, you will now receive only $30,000 for that same $40,000 fire loss, less your deductible.

Keep in mind this is a broad definition of co-insurance. There are a number of factors that can influence the true value of a building. The important thing to remember is not to be underinsured if you have co-insurance or you will probably have to spend out of your own pocket to make necessary repairs after a loss.

Building code coverage is necessary to cover any building code upgrades required by your local building department as a result of a covered loss. You need to realize that the insurance carrier is only obligated to pay you for what was damaged or destroyed. For example, if current building codes in your area require a sprinkler system, but your damaged unit doesn’t currently have one, you will have to build that unit back to current code. Without an endorsement for these code upgrades, that sprinkler system will become an out-of-pocket expense. If you are unsure if your policy includes this endorsement, you should contact your carrier. This endorsement can usually be added for an additional premium.

Policy Review
I know that reading and understanding an insurance policy is not the most exciting way to spend an afternoon, but if you ever suffer a major loss you will understand how valuable that afternoon could have been. As a property owner or manager, it is critical that you understand how your policy works and the effect that it will have on your business after a loss.

Consult an insurance professional to figure out the type of coverage that is right for you. If you have questions regarding your coverage, contact your insurance agent or broker, or call on a licensed public adjuster for a policy review. Remember, everything–including your insurance policy–needs a little maintenance once in a while.

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or SF Apartment Magazine. Jim Nevins is the president of Acclaim Adjustment, Inc., a national public adjusting corporation based in the San Francisco Bay Area. For more information, visit www.acclaimadjustment.com. Copyright © 2007 by SF Apartment Magazine. All rights reserved.