Landlords have numerous concerns to contend with regarding renting to tenants such as their ability to pay the rent, what type of operation will be leased, does it comply with all the laws, and will it present any conflicts amongst the other tenants. They are also faced with numerous regulatory building codes and requirements that in some cases hamper the property’s ability to earn a profit. And of course, how to protect the investment in the event of a claim.
Covering the exposures of an apartment house is not much different than covering a warehouse or mixed use property. The main differences in coverage would generally be contingent on the type of tenants occupying the premises. The inherent exposures of a steel mill are quite different than a chiropractor’s office. Hence, when evaluating the necessary to perils to protect against, its important to evaluate what could happen.
The first question to insuring a commercial building is to ask what is the maximum
loss if the building was completely destroyed by a fire or hurricane including the
expense the demolishing any remnants, clean-
A policy condition called the coinsurance clause basically states if the coverage does not meet the required percentage of the replacement cost, then the insurer may apply the coinsurance penalty in the event of a partial loss. For examples, if there is an 80% coinsurance clause, and the replacement cost of the property is $ 1,000k but the amount of coverage provided is only $ 400k, then the coinsurance penalty is 50% . Thus any partial losses, such as a $ 100k claim would be subject to a recoverable amount of 50% as the insured is deemed to have been coinsured by not covering the property to at least 80% of the replacement cost. Hence 80% of $ 1 million is $ 800k and if the amount of coverage was only half that amount, then the coinsurance percentage would be 50%. If the amount of coverage was $ 600k, then the percentage of coinsurance would be 75%.
The first rule is to secure the proper amount and to avoid the dreaded coinsurance penalty. It is true that inflation increases the cost of construction over time, therefore it is recommended that an appraisal be conducted on a periodic basis. A way to avoid or prevent inflation from eroding the coverage is to add an inflation guard that will automatically increase the coverage upon the renewal usually be a fixed percentage.
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