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| Overview |
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Major losses to state buildings leave you having to make decisions you would not have faced with a smaller loss . . . Would you be wiser to repair or to replace the structure? Should you do some deferred maintenance, remodeling, or strengthening while you are doing the damage repairs? Should you just scrap the structure and use the insurance money for some other purpose?
Major losses also leave you having to deal closely with people you may not know. The state´s excess property loss insurers may be involved. As commercial insurers, they have a great concern for your details, documentation, and legal duties. Their concern is often greater than ours. We use state money to restore state property. The excess carriers use their own money to pay for someone else´s property. It gives them a different point of view.
We have had experience with large losses in recent years. This RisKey is meant to share that experience with you. We hope you never need to know what we have learned. But, here are some of the issues in major losses:
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| Repair |
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A repaired building is one that is returned to about the state it was in the moment before the loss. This means it is no better prepared to ride out a future flood, fire, or quake than it was for this one. If it was an ugly drafty old masonry tomb (with asbestos and cracks) before the event, it will be about the same after insured repairs are done. In other words, only the damaged area will be repaired.
Sometimes people have expected the Insurance Fund or the excess insurers to pay for things that are not really repairs. Insurers call these betterments, excluded costs, or indirect costs. For example, managers have asked in vain that insurance pay for these costs. These are not damage repairs:
- Replacing unreinforced masonry with reinforced masonry. Adding structural supports that were not there before.
- Adding doorways, lighting, plumbing, air-conditioning and wiring that was not there before.
- Removing asbestos insulation from pipes or walls or floors or PCBs from transformers.
- Enlarging utility conduits and pipelines.
- Fixing foundations, beams, doors, roofs, or fixtures that were not damaged by the event.
- Tearing out and replacing a wall, floor, or roof that had only cosmetic damage.
- Making their building stronger, safer, more useful, or prettier than it was before.
If repairs are cheaper than replacement, insurers only pay for repairs. Usually, but not always, this is the same choice the building owner would make.
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| Replace |
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It means replacing the ruined structure with one similar in function, features and cost to the destroyed building. The replacement will be a new structure about as useful and sturdy as the old one was the moment before the loss. Of course, if the old building was really old, the new one will have to be somewhat better because it must be built to today´s codes. Under current policies, the cost of essential code compliance is covered. But, neither the Insurance Fund nor the excess insurers can pay for what you wish the old building had been or what you might like a new building to be. We can only replace the old one´s usefulness.
Replacement value can depend on what you will do with the insurance proceeds. If you and the insurers agree on what they must pay, you will then be free to build or do what you want with the money. However, the insurer´s duty to pay full replacement cost is reduced if you do not really replace the ruined item. Usually, your payment will be reduced for the worn condition of the old structure at the time of loss. This is called depreciated value or actual cash value.
Also, not everything is covered as part of a building. Most paving, sidewalks, streets, landscaping, and parking lots are not repaired or replaced by insurance. Ornamental trees and fencing are covered only if you elected to report them for coverage in your annual Risk Report.
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| Extra Expenses |
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You may have to take extraordinary steps to keep operating after a loss. You may have to rent space until repairs are done. You may have moving costs. You may have employees work over-time. Maybe you have to rent equipment while damaged items are being repaired or replaced. To the extent that those steps are necessary and are caused by the loss event, their costs are covered as extra expense.
There is a cap on this special coverage. It cannot exceed the amount of the loss or a maximum of $250,000. Note: Emergency measures you must take to protect the property from further loss (rain covers, boarding up windows, etc.) and debris removal are not taken out of your extra expense. They are covered as part of regular repair or replacement cost. Also employee basic salary is not considered to be part of the extra expense coverage.
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| Caused by the Event |
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Insurance normally pays only for damages caused by some accidental, harmful event. This means the perilous event was the direct cause. It does not include indirect results or side-effects. It does not include the extra trouble that you face in having to deal with the fact that you have had a loss. Loss of rents, loss of revenue, having to divert staff to arrange repairs -- these are not direct property losses. Neither are the costs of inflation and interest between the date of loss and the date of repair or replacement. Damage caused by your failure to board up, cover, or otherwise limit the damage after the loss event is not a direct property loss either. These are indirect costs. They are not paid as if they were damages caused by the event.
Sometimes what you may think of as an indirect problem is covered. It just is not covered the way you would like. Say you have to repair a damaged wall. It may cost more than most walls to repair because it is insulated with asbestos. Repairers will have to seal off the area and suit up to work in it. Insurance will cover those increased costs of repairs. You might prefer to remove all the asbestos and replace it with fiberglass. But the asbestos problem was not directly caused by the event that damaged the wall. Insurance will only pay for the direct damage. It treats the asbestos as a costly complication; not as something it must pay to remove. Insurance covers debris, contamination, and other damages that were caused by the loss event. It does not correct problems that were there before the event.
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| Necessary Costs |
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Insurers often refer to the costs of repair or replacement with language like "reasonable and actual" or "reasonably necessary" or similar terms. Their point is that they agree to pay only for what must be done because of the loss event. That does not mean what is wisest to do. Sometimes what a wise owner would do in repairing or replacing a structure is not what an insurer has a duty to pay for. Sometimes an owner may unwisely run up the cost through ignorance, mistakes and delays. Again, the insurer has no duty to pay for these problems.
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| Coordination and Documentation |
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Major projects need coordination and documentation. When you depend on someone else to pay for work you will do to your property, it is wise to coordinate with them, even your planning. You may need to hire firms to analyze your loss and plan the repair or replacement. If you do this without talking to and coordinating with the insurers, you risk wasting money. You may not ask your engineer the questions that the insurer will want to know. Your engineer may make plans that will not fall within the duty of your insurer to pay. More than once, an agency has paid for the design of a building that was not what the insurance would pay for as a replacement. The wasted costs of this engineering were not covered. Do not go it alone on a major loss if you expect someone else to pay your bills. Make sure the people with the checkbooks are signing off on what you are doing. Use your best skills to coordinate with Risk Management for a successful result.
And, keep good documentation on everything.
We can sometimes give an agency a little leeway on documentary detail. But commercial insurers, like our excess carriers, will require proof of every cost on a major loss -- that it was caused by the event and that it was a necessary repair, replacement, or extra expense.
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