budget preparation right around the corner, most property managers,
board members and owners are taking a close look at their upcoming
expenditures. In this economy, it is essential that each dollar be
spent wisely, and bring the maximum return.
the carrier will pay the loss up to the policy limits, minus the deductible.
should the property fail to insure to the co-insurance percent-age,
the insurance company will not pay to the full limit of the policy.
is an insurance appraisal? In basic terms, an insurance appraisal
is a replacement cost analysis that provides an accurate estimate
of the amount of insurance required to replace each structure
and amenity insured exactly as it stands when the report was prepared.
item that is sometimes neglected in budget preparation is an insurance
appraisal. It is important to note that in today’s market,
in many instances, insurance carriers are requiring an up-to-date
insurance appraisal before they will write coverage for the property.
What is an insurance
appraisal? In basic terms, an insurance appraisal is a replacement
cost analysis that provides an accurate estimate of the amount of
insurance required to replace each structure and amenity insured
exactly as it stands when the report was prepared. Some association
boards opt to esti-mate the amount of insurance needed, or estimate
the percentage to increase their coverage from year to year. If
a property has never had an insurance appraisal performed, previous
policy limits may have been based on erroneous values. By estimating
the percentage to increase coverage each year, this error may have
been perpetuated, if not increased. This could result in the property
being over-insured, in which case property owners are paying excess
premiums, or the property could be underinsured, in which case owners
could be faced with having inadequate funds to rebuild the structure,
should a loss occur.
already, many properties have reported that the carriers are requiring
an insurance appraisal before they write coverage. Other properties
are find-ing that the carrier is willing to write the coverage, but
only with the insertion of a co-insurance clause. The co-insurance
clause requires that the property be insured to a certain percent
of value, usually 80 percent. (Although this example represents a
typical insurance policy
for condominiums, it is not meant
to provide an interpretation of an individual condominium’s
insurance policy.) Should there be a loss and the property
look at a theoretical case. Condominium A is valued at $750,000,
and has an 80 percent co-insur-ance clause. Therefore, in order
to satisfy the co-in-surance clause of the policy, Condominium A
needs to insure the property to at least $600,000. However, the
board under estimates the insurable value of the building and chooses
to obtain a $300,000 policy with a $2,000 deductible, and has therefore
only insured to 50 percent of value. If the property incurs a $200,000
loss, the insurance company will pay 50 percent of the loss ($100,000)
minus the deduct-ible. The association will receive only $98,000
from insurance and will be responsible for the remaining $102,000.
If Condominium A had chosen to have an insurance appraisal performed,
the building would have been insured properly, and no co-insurance
penalty would have been applied. The association would have then
been responsible only for the $2,000 deductible.
in which obtaining an insurance appraisal could save associations
money is in limit-ing litigation. We recently heard of an association
in which a loss occurred. Owners in the association felt that the
board had been negligent in providing for proper coverage of the
property and sued. The board was found not to be at fault, but only
after months of litigation and legal fees. Had the board and man-ager
obtained an insurance appraisal, the litigation would have been
You can see
why more board members and man-agers are discovering for themselves
the value of an insurance appraisal. Having a third party construc-tion
cost valuation performed not only provides the correct insurable
values, but also provides peace of mind for the board, the manager
and the agent.
D. Riemann is a certified construction inspector and is the senior
appraiser at GAB Robins North American Inc. in Lake Mary, FL.