Insurance Coverage Help!!!

4 Replies

HI!  So I purchased my first property, a 4 unit building in the west suburbs of Illinois, this summer. I was initially quoted $1750 per year for insurance coverage from a local company. Then the inspector comes out and says the replacement cost for the building should be 1,000,000 and not 264,000 (the price I paid for the building). The insurance company then contacts me to say the building is underinsured and they can not renew the policy at this rate. So now I'm looking for a new insurance company that will just cover ACV and not replacement cost of the building. Has this happened to anyone else? Does anyone have insurance company recommendations that will just cover actual cash value vs. replacement cost. With having a total replacement cost at 1 million, it eats into my cash flow so any recommendations and suggestions are welcomed!! 

Thanks in advance,

Shardae

Hi Shardae, I've been a licensed property loss advocate and insurance consultant to multi-family property investors, financial and affordable housing lending institutions, for around 25 years. I am very familiar with the two and three story ordinary structures in the Chicago area and the related insurance valuation methods and software. The amount of coverage being relayed to you, sounds about right, as Illinois is a non-market value state. Your carrier is probably rejecting coverage, because you have a conventional policy that requires a RC coverage amount, of which you are drastically below that. All values are based on Replacement Cost (RC), with Actual Cash Value (ACV) being determined by a segregated valuation, typically Marshall Swift Boeckh's, for these type of Class C structures. The depreciation applied, would be based on the age, lifespan, and condition of the structure and interior components, as a whole. While these values can be very subjective, a building in fair to good condition can carry a depreciation rate of between 30 and 40%, which deducted from the RC would be the ACV. You can choose an ACV or RC policy, through your broker choice. There are three types of policies; Conventional, Co-insurance, and Agreed Value. All of these have different premiums, pertaining to the amount of participation you choose to expose yourself to. Conventional allows you a policy of coverage, complying with the RC conditions of the policy and paying the premium for the same. Co-insured policies, often referred to as Surplus Lines policies (most multi-family investors choose this type) allow you to insure the property for RC or ACV, for 80, 90, or 100% of the RC  insurance to value (ITV), at a reduced premium. Most of the Surplus Lines carriers, have A, AA, or AAA+ ratings. The only requirement, is that you maintain the listed percentage amount in coverage, to avoid penalty. You can set the amount of coverage that you wish to have, however, if you are below the percentage listed, you would be penalized at the time of any loss, via the calculation, insurance carried / insurance required X the amount of loss. Example; if you carried 60% of the RC and sustained $100,000.00 in damage (this could be a couch fire on the 2nd floor), you would only receive $60,000.00, prior to deductible. The final is Agreed Value. It is a policy where the carrier agrees to an amount of coverage, RC or ACV (typically less than the RC), based on the risk, location, and its ITV. This coverage precludes coinsurance and that requirement, even if the carrier agrees to an amount, substantially less than the RC and the premium can be competitive to Surplus Lines, but can be as high or higher than conventional, so you want to be diligent and knowledgeable to your value.  The state of Illinois requires the insured (you) to place the value. If you'd like to discuss options, there's no charge in a preliminary discussion, to help you determine a plan or strategy... Thanks

Originally posted by @Shardae Young :

HI!  So I purchased my first property, a 4 unit building in the west suburbs of Illinois, this summer. I was initially quoted $1750 per year for insurance coverage from a local company. Then the inspector comes out and says the replacement cost for the building should be 1,000,000 and not 264,000 (the price I paid for the building). The insurance company then contacts me to say the building is underinsured and they can not renew the policy at this rate. So now I'm looking for a new insurance company that will just cover ACV and not replacement cost of the building. Has this happened to anyone else? Does anyone have insurance company recommendations that will just cover actual cash value vs. replacement cost. With having a total replacement cost at 1 million, it eats into my cash flow so any recommendations and suggestions are welcomed!! 

Thanks in advance,

Shardae

 Shardae, if you are not concerned about having building coverage above the $264,000, an Agreed Value policy is your solution.  It's an easy fix.

Thanks everyone! I will look into an agreed value policy. I have no emotional ties to the property, its purely an investment for me, so agreed value looks like the best route for me.