January is a good time to plan for the year ahead. For every property owner (or property manager), this should include thoroughly reading your insurance policies. Not just the declarations page or the ACORD certificate, but the actual policy.
There can be significant differences between the degree to which various insurance policies cover losses due to casualty (fire, accident, etc.). This is true even for partial loss claims that are well below the coverage limits. Regardless of the size of the loss, your policy may not provide full replacement coverage if it contains a provision known as "co-insurance."
Under a co-insurance provision, the policy holder may have to pay more than just the policy deductible for a loss. In other words, even though you may have $5MM of coverage and the loss is only $1MM you may still have to pay your deductible PLUS a significant portion of the loss. That is how the co-insurance clause works - you become a co-insurer along with your insurance company!
A typical co-insurance clause reads something like the following: "If, at the time of loss, the limit of insurance is less than 80% of the full replacement cost of the property immediately before the loss, we will pay a proportion of the cost to repair...." This clause is often buried in the policy's boilerplate.
Property owners facing co-insurance issues often are caught unawares by issues such as determining "full replacement cost of the property immediately before the loss." How and when is this determined?
More important, how does a prudent property owner (or property manager) protect herself from co-insurance expenses, especially in times of rapidly changing property values and/or construction costs? First, read your policy carefully. If it contains a co-insurance provision, you need to review your loan documents to be certain this is not a violation of a loan covenant. If you decide to keep this policy in place, you should consider, among other things, obtaining an annual replacement cost appraisal, which can serve as a guideline to setting your policy limits.
There are other insurance issues that you ought to look for as you read your policy, such as whether the policy might become void if the property is vacant, or whether you can rebuild after a partial loss without paying off your mortgage. Prudent property owners should be mindful of all of these types of coverage issues and should remember that there can be significant variation on these types of coverage issues between carriers and policies.
Lindquist Gets Real is a periodic publication of Lindquist & Vennum LLP and is intended to provide tips and basic information about real estate law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you