Tuesday Morning Insurance Tidbit - A TMIT Two-Fer

[InsuranceMan]

Happiest of Summer Days, to You, Dear Reader,

 

     As you may or may not know, summer is a busy time of year around the Insurance-verse and a lot of renewals and new business occur between the July 1^st date through the middle of the month each year, which means that I, InsuranceMan 2.0!!!, have been extremely busy the last many weeks.  On top of that, I have been in Louisville, KY doing presentations on Distillery Insurance which took some time away, further delaying my ability to get out the TMIT in a timely manner.

     However, I am back in the swing of things, and I have a special treat for you today.  Not only is it a Tuesday Morning Insurance Tidbit on a Thursday, but it is also a TMIT TWO-FER!!!  That’s right, I am going to touch upon two different topics today, all wrapped into one.  I know, super exciting … but try to contain yourself.  It is a lot to take in, for sure, so if you need to read the first part and then take a breather, and get back to the second part later, I understand.

     The first topic that I want to touch upon is “REPALCEMENT COST” coverage, under your property portion of the policy, specifically for your buildings or Tenant’s Improvements and Betterments (TIB’s).  If you have either been hiding under a rock for the last year, or just not paying attention, let me tell you what I am talking about.  According to Business Insider, the cost of lumber has risen over 250% to 300% in the last year.  “OK, so what?  What does that have to do with my insurance?”  I am getting there dear reader, patience. 

     You know that eight-foot long 2x4 that you used to buy for $2.40?  Well, if we use the numbers from the folks at the magazine mentioned above, that means that one singular 2x4 is now going to run you upwards of $6 to $7 a board now.  That 4’x8’ 5/8” OSB board that had been around $25 a sheet a year or so ago, well, it is now closer to $75 a sheet.  That 6x6 …  yeah, yeah, yeah, I know, you get it.  Here is the long and short of this and how it ties into your insurance …

     When your property policy describes “REPLACEMENT COST” (RC) it defines RC as the cost to replace your property with “like kind and quality” up to the limit specified.  This means that if they need to replace a computer that you bought 3 years ago for $1,000 (that is now a bit outdated) with the same computer now that they can buy for $300, then that is what you will get, $300 since it is the same computer, the cost has just come down.  If they don’t make that computer anymore, and they have to replace it with the same RAM, SSHD, etc., and the only thing they can find is $1,200 then you will get the $1,000 (the fictitious limit you had on the fictitious policy in this case), minus the deductible, and you will have to eat the extra $200.  Again, RC is “UP TO THE LIMIT” stated on the policy.

     Take that example and apply it to your building.  With lumber skyrocketing, if your policy limit has not been adjusted, that could be a huge issue.  Let’s say that your building was originally built for $350,000 years ago, but it is still showing that same $350,000 limit now, you are probably under insured.  If it is a frame structure, OSB decking for the roof, etc., your replacement cost in today’s construction world could be in the neighborhood of $900,000 to $1,000,000 !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!  Yeah, that is a lot of exclamation marks, because this is kind of a big deal.  Your policy says “REPLACEMENT COST” of $350,000 and now it would cost $1,000,000.  That leaves you on the hook for around $650,000 since the most the policy will pay is the limit shown on the policy, that is why they show you a limit.  Again, BIG DEAL!  To make matters worse, you more than likely have a co-insurance provision of 80% or 90%.  I have done articles on co-insurance previously, so you can go read those if you want an in-depth understanding of that, but, sufficed to say, once co-insurance is factored in it could leave you well short on the amount you receive to try and replace your building.  Something to certainly think about.

     The last thing I want to say about this is, no one wants to overpay for insurance premiums, and just because lumber is up, does it mean you should adjust your policy to a higher limit to make sure you are protected?  Well, that is a slippery slope.  It is true that lumber may come back down, and you may be ok with your current limit a year or so from now, but what happens in the meantime?  That is a huge unknown, but it is something that you should definitely keep in mind and have a conversation with your insurance agent about, and if your insurance agent is not InsuranceMan 2.0!!! you really need to ask yourself, “why!?!?!?”.  I digress.  As long as you know the risks, you can then decide as to if you want to self-insure that exposure, or adjust it to fit the need.  You could also discus “Functional Replacement Cost” with you agent (and again that agent should be me!).  Basically, this would be an option for stating a coverage limit of “X”, but as long as you get the same square footage and functionality, you don’t care what kind of material it is replaced with.  Functional Replacement Cost allows for the carrier to reconstruct your former stick built property from metal (let’s say) in order to accommodate the same square footage, etc., for the amount listed on the policy since you may be able to reconstruct a steel building for much less than a frame building if you are limited by the value you had on the policy.  Again, just another way to solve this possible issue.

     OK, if you need a breather, now is the time.  I will wait ……………….

     Ah, back so soon?  Excellent.  On to the second topic of the TMIT TWO-FER!!!  Fire Rating Scores.  This one is a “hot” topic (pun kind of intended), but it is no laughing matter.  Fire Ratings are constantly updated throughout the year through a complex algorithm of wild fire models that provide underwriters with probabilistic loss metrics based on 80 distinct geographic data sets and 300,000 simulations of wildfire data.  This is broken down into several subsets such as Risk Score; Brush Fire; Preburn Scores; Preburn Distance; Firebreaks; Average Days of High Wind; etc.  Ok, we know this is complex, and you don’t need a history lesson in fire ratings here, just the info that you want to know.  What you want to and need to know is that the country is on fire and things have been hot and dry!!!  Don’t believe me?!?!  Check out this website from the Fed’s: https://inciweb.nwcg.gov/ .  This is a live tracker of all of the fires in the country.

     So, how does this effect you?  Well, it could affect you greatly if you are in these hot and dry areas around the country and your insurance is coming up for renewal.  Let’s take the Brush Fire rating for instance.  Near my neck of the woods this rating went from a 30 (on a scale of 0 – 100) this spring, to 100 currently.  This means that underwriters are taking this matrix of scores into effect and we are seeing some rate increases of anywhere from 1 to 1.5 TIMES in the way of premium.  That is not 1 to 1.5%, let’s be clear, it is a multiplied increase of 1 to 1.5 times.  I have one insured that was paying around $60,000 last year and on their July renewal (remember above, there is a lot going on in July), their premium jumped up to nearly $90,000 for the year.  That was not due to an increase of stock on hand, or a huge sales year, that was mainly due to property, location, and these fire ratings.

     There are a few ways to handle this kind of situation and avoid getting caught up in this underwriting anomaly that I have worked through and crafted answers to in the past, but I am not going to divulge them here.  Kind of Trade Secrete and all and if other insurance folks can’t figure it out, I am not going to help them, but I will help you.  Call me, email me, send up the InsuranceMan 2.0!!! sky beacon, whatever you like, but get a hold of me if you are facing this situation, and I will help you out.

     To long and short of this TMIT Two-Fer is this … between the cost of construction going up and the fire hazard in this country being incredibly high in many areas, it is potentially a dangerous time in which underwriters are being very cautious and taking more premium for risks, and building could be undervalued in a world on fire.  A perfect storm so to say.  As well, if you are in a high fire hazard area, you may find yourself faced with the dreaded NON-RENEWAL !!!!!   GASP!!!!!  It is true, I have had some carriers state that although they were on the risk in the past, they are not longer able to offer terms.  If you need assistance with a cancellation/non-renewal, or in figuring out what to do, or if you are covered adequately, or if you are coming up for a spike in renewal premium, and you need assistance, get a hold of me and I will gladly assist you, Dear Reader.  Until Next Time ….

 

Stay Vigilant,

 

Aaron Linden – a.k.a InsuranceMan 2.0!!!

307-752-5961

insuranceman2.0@yahoo .com            or            aaron@roaringforkins.com