Property Insurance concepts should never be as difficult as those for liability insurance.  After all, you should know what your property is worth.  Or do you?
Now most of the valuations and criteria apply mainly if Mayor Lofton is given the building for $1.00.  Then we own it and we must insure it for Property Insurance besides Liability Insurance.  If we lease it for $1.00 per year from the school board, then they will tell the Town what the value of the building may be under the Leasing Contract.  I guarantee if we have to secure insurance, a property insurer will require an inspection and possibly a VACANCY PERMIT, which will be explained later.




Let’s review an example pertaining to the worth of a property you recently purchased.  It is a twenty year old building for which you paid $3,000,000.  Yet, your insurance agent advises you that an appraisal may be necessary.   The agent advises you that based upon the square footage of your building, the Marshall Swift Boeck cost estimator which was performed by the insurance agency shows your replacement cost value to be more nearly $2,000,000.


Yet the insurance company approached stipulates it requires proof of the updates which may have made to your building.  If you do not provide these updates, the insurer will only be able to insure your building for $1,600,000 because a 1% depreciation factor per year was used in determining the building’s actual cash value.  Besides the valuation factors, you are now hearing terms such as coinsurance penalties, and exclusions.  Plus, the insurer may not provide certain coverage for you such as building ordinance coverage because your building is too old.


At this point, you throw up your hands and say, “Just insure me”.  You are angry because you just took a loan out for $3,000,000 and someone is now telling you that you are only able to insure this building for $1,600,000.   Don’t panic yet, your mortgagee prior to securing a loan may have taken a survey and may have agreed with the replacement cost valuation.  The Mortgagee requires appraisals and surveys prior to providing you a loan in the first place.  If you did not have to take out the loan, you may have other reasons for purchasing the property and may not be upset with the valuation.  There are things you should know, however.


First let’s review the valuations.   When you purchased your building it was based upon “Market Value” which is the value for which a seller is willing to sell his or her property and the value at which a buyer is willing to pay to purchase the property..   Market value has nothing to do with the “Replacement Cost” of the building.  And, market valuation includes the land and foundations which are not usually the subject of insurance except with respect to the foundations covered by flood insurance policies.


When you inquire of your agent as to what the term replacement cost” means, you may be told it is the cost to repair, rebuild or replace your property with a like kind and quality.   Yet, you are thinking, if that is the case why am I not being provided a $3,000,000 value?   There had to be an inflationary increase in the value of the building from the time it was built!  Yes, inflation is a factor when determining the replacement cost valuation.  Yet, you have been told that your building is to be insured on an actual cash value basis, similar to the manner in which your vehicle is insured, unless you are able to provide evidence of heating, roofing, wiring and plumbing updates.


There is also Functional Replacement Cost which may be the valuation placed on older buildings for which actual replacement cost may be so high in today’s market to replace the building with a like kind and quality that it may not be able to affordable to insurer or replace the building in a like kind an quality.  Yet the building has all the functions which were required for your business. Therefore, Functional Replacement cost values a building based upon the actual functions and features which may be required in order to operate your business, but the valuation takes out certain areas of superior construction or built-ins which may not be absolutely necessary.  Your appraiser will need to provide you with assistance in making such a determination of an older building.


To give you another example, let’s look at the types of building which may be considered for functional replacement cost valuations.   Have you ever noticed the antique buildings in Virginia City, NV or other parts of the West?  The buildings contain antique ceiling plates, hand carved wood, and authentic features of the 1700’s.   One could not replace a building with these features on a replacement cost basis.  And to cover such a building on an actual cash value basis would offer only a small portion of what the building should be valued at after depreciation is taken into consideration. Yet, one could provide a building that would be similar and would function with newer products utilized in the building to give it the original antique ambiance.  The costs, however, would be lower to utilize man made products which may be processed to look like the antiques of yesteryear.  Thus, functional replacement cost comes into play.  This type of valuation may also be beneficial when insuring a vintage manufacturing premise which ultimately could not be replaced in today’s market.

Actual cash value is defined as replacement cost less depreciation or obsolescence.  You will note above, the actual cash value at the building was determined with a 1% depreciation factor per year, which may maximize at 40% or $1,200,000.   So, what does this tell you?   If your only option is to insure your building on an actual cash value basis, consideration better be made to upgrade your electrical, your plumbing, your heating and air conditioning equipment and your roof.  Or even with inflationary trends added to your actual cash value valuation, your building asset will be worth far less than what you have paid.  And, in the event of a total loss, there would not be sufficient money to purchase a building of a like kind and quality.  When you purchased this property did you take into account the repairs which may be required?  I BET COVERAGE FOR SHE WILL BE ON AN ACV BASIS


Make certain before you enter into a lease agreement that you review your contract in advance.  It may be that you may be required to include coverage on the building you are leasing.  The lease may even stipulate that you are required to insure the building for a specific limit or list no limit but require coverage to be written on a replacement cost basis.   You may also be required to include coverage by a certain valuation, under contract.  Make certain that the Landlord agrees to the amount as being either the replacement cost, or its actual cash value.


The valuation or lack thereof may present a problem.   Both you and the landlord would have an insurable interest in the property to the extent of the contractual obligations. And, as we discussed previously under the liability portion of the policy, the Landlord would request he or she be listed as an additional insured and loss payee with respect to the property.  You may also be required to add the Landlord’s mortgagee as their interests may appear.


The first clarification that must be established with the landlord is how the valuation shall be arrived at.   If there is a limit such as $300,000 listed, is that limit the “actual cash value” or is it the replacement cost of the building?  In any event, an appraisal will be required from the landlord whether a limit is provided or if no limit is listed but replacement cost coverage is required.


The landlord may also stipulate you may be responsible for all glass, at which time you may have to include separate glass coverage for such causes of loss as “Breakage or by chemicals accidentally or maliciously applied”.  As a reminder your building definition includes building glass.  However, such damage to the building must have occurred as a result of a covered cause of loss.  Breakage alone may not be covered and you may be subject to a higher deductible.  And, if coverage is being written under a legal liability form, it is suggested, for all safety purposes, you secure a separate glass policy, scheduling each and every plate of glass including windows and doors.


You will recall from our discussion of liability coverages that Fire legal liability coverage may be provided.   However, some insurers may not only include fire under the legal liability provisions but also fire, explosion, lightning, smoke and water. If the perils are not requested under the lease agreement, you must inquire as to the intent of coverage.  For instance, the landlord may require that you include the building on an “all risks” basis subject to exclusions and/or limitations.


Remember to apprise your landlord that any risks of direct physical loss coverage which you may obtain shall be on a “legal liability” basis.  If you are not legally liability, you shall not be required to provide an insurance payment under the policy.  Your landlord will be required to also carry a property insurance policy.


If the landlord does not carry a property insurance policy, your underwriter will have to be notified and coverage shall have to be included under your regular property provisions; however, with the landlord as an insured.


However, if you are required to provide a “risks of direct physical loss subject to exclusions and or limitations policy” on a legal liability basis, it is best to include such coverage under a legal liability form attached to your property insurance contract.  Unlike the limited perils coverage which may be applicable to the each occurrence liability portion of the policy, the legal liability coverage part attached to the property agreement may include all the causes of loss included under the property insurance form.


Under the Legal Liability Coverage form which may be added in addition to the property form, certain exclusions do not apply such as Ordinance Or law, Governmental Action, Nuclear Hazard, Utility Service and War and Military Action.


Nevertheless, it is best to determine the intent of such contracts as to the valuation, and the causes of loss to be covered, prior to signing such an agreement.  Again, any such contracts that appear ambiguous or are not clear in intent should be reviewed by your attorney to assure the performances of each party to the contract are understood and complied with.


As to the Legal Liability coverage form which may be offered by the insurer, it may stipulate it covers the following:


The insurer will pay whose sums which you become legally obligated to pay as damages because of direct physical loss or damage, including loss of use to covered property caused by an accident and arising out of any covered cause of loss. (Note, you are covered for your legal liability if there is a direct physical loss, if it is accidental and if it is a result of a covered cause of loss.)


The insurer will have the right and duty to defend you in any suit but will not pay more than the limit as described in the declarations.  The insurer may investigate and settle any claim or suit at their discretion and will have the right and their duty to defend stops when they have reached the applicable limit.


The insurance contract will also state that the most which will be paid in damages as a result of any one accident is the applicable limit of insurance shown, except for any additional coverage which may be provided.  And similar to the liability policy, it is stated that the existence of one or more additional insureds or newly acquired organizations does not increase the limit of insurance.


As with any contract it is important to stipulate whether the insurer may or may not have the ability to settle and investigate on your behalf.  In most property and casualty insurance policies, that duty remains with the insurer who has a staff of professional attorneys and outside lawyers with specialties they may call upon.  However, as you will see with respect to professional liability, it would be professional suicide for the insurer to have all rights in settling a professional’s suit.  It could mean the end of a professional’s career in the event the professional was not given the opportunity to assist in such settlement.


Let’s also consider the contractual side of insuring your buildings, also known or referred to as “real property” in the insurance industry:


Make certain you list all the entities who are involved under the policy.  Some landlords may have various ventures or additional entities which also must be included as an insured or additional insured under the policy you are required to provide.


Who is responsible for the rents if the property is untenable?


Is the party who is leasing the building (Lessee) responsible for additional insurance premiums because of the occupancy?  Fire Legal Liability because of a manufacturing hazard; liquor liability because of a tavern or restaurant occupancy, which may also bring forth a Lessor in a suit, Pollution Liability coverage for waste; and workers compensation insurance.


Is the Lessee responsible to hold the Lessor (the one from whom you are leasing the premises) harmless?


Are improvements and betterments allowed?  And who is responsible for each premium.


Since property insurance does not include such items as electrical arcing, steam boilers and equipment breakdown, will the lessee be required to carry a separate Boiler and Machinery policy?


Is the lessee required to provide loss of rents or leasehold interest coverage for himself or herself or business income coverage for the lessor also with respect to both boiler and machinery and property time element coverage.


If the lessee is allowed to have a change in the structural alterations of the building, the lessee must also consider adding an additional exposure under his or her general liability policy or better, transferring the risk to a contractor who will be performing the structural arrangement.  Your lessor will be required to be covered as an additional insured by all parties.


Will the Lessor accept the insurance carrier writing the Lessee’s policy?  Is it rated as financially strong enough by A.M. Best or Standard & Poors?


A Legal Liability coverage form usually states it will pay for those sums for which you become legally obligated to pay as damage because of direct physical loss or damage, including loss of use, to covered property caused by an accident and arising out of any covered cause of loss.  The company will have the right and duty to defend in any suit seeking those damages but THE AMOUNT IS LIMITED TO THAT WHICH IS DESCRIBED IN THE POLICY.


The property which is covered is the tangible property of others in your care, custody or control which is described in the declarations or on the Legal Liability coverage schedule and it also limits the covered causes of loss to those shown in the policy declarations.  The exclusions section of the form refers applicable Causes of loss form shown in the declarations.


There is an Additional Insured clause usually included which stipulates that if the named insured is a partnership or corporation throughout this coverage form the words you and your include such partners, executives, officers, trustees, directors and stockholders of such partnership or corporation but only with respect to their duties as such.


For years if an owner lost his or her only tenant, he or she would leave the building in a tenantable manner by including curtains in the window and providing furnishings to provide an image that the building was occupied.  In the event of a loss it was then argued that the building was not vacant but it was merely unoccupied, not subject to the vacancy provisions.  In an attempt to avoid adding a vacancy permit under a property insurance policy, many agents advised their insureds to leave some furnishings and include curtains or blinds in the building.  A vacancy permit is issued for a number of days such as 90 or 120 days and the additional cost was in excess of $1.00 per $100 of insurance.  A vacancy permit will usually allow for the same causes of loss you would have enjoyed, prior to such vacancy or unoccupancy.


Besides the vacancy permit, the underwriter may have require certain specifications be complied with such as boarding up the windows or securing the property in some manner so that homeless people did not make the building their home (many a fire has been started by the homeless who have taken possession of a building in the dead of winter).  By boarding or securing the windows, it may also prevent vandalism to the building glass.  It may also be required that the building be inspected daily by a security person, property manager or by the owner.


Today, there is no question as to what is construed vacant or unoccupied. The policy stipulates that when the policy is issued to the owner or general lessee of a building, building means the entire building.  Such building is deemed vacant unless at least 31% of the total square footage is (1) rented to a lessee or sub-lessee and used by the lessee or sub-lessee to conduct its customary operations; and/or (2) used by the building owner to conduct customary operations.  Buildings under construction or renovation are not considered vacant.


If your building has been vacant for more than 60 consecutive days before a loss or damage occurs, the insurer will not pay for any loss or damage caused by any of the following, even if they are included under your policy as a covered cause of loss:

Some of these will not be provided for SHE under a basic fire policy such as water damage or Theft, including glass breakage and there are no sprinklers..


Sprinkler leakage unless you have protected the system against freezing;

Building glass breakage;

Water damage;

Theft or attempted theft.


With respect to the other causes of loss, the amount the insurer would otherwise pay will be reduced by 15%.





And last but not least, replacement cost coverage does not include the increased cost attributable to enforcement of any ordinance or law regulating the construction, use or repair of any property.  If at the time of loss you are required to replace the windows of your building to the applicable building code, or if you are required to change your wiring to a specific code, these are costs that come directly from your bottom line.   Be prepared for this additional cost.  And there would be no coverage for the demolition of your building nor for the undamaged portion of your building without this coverage.


It is usual for insurers to not offer ordinance or law coverage even though it may be requested, if your building is of a certain age, usually 20 years old.  The insurer’s thoughts are that the building should have been maintained throughout the years, and if the entity is asking for this type of coverage, it is to pay for the building code changes the insured was unwilling to comply with.    And if you think this may be an increased cost to you for one building, compound this figure, if you elect to live in a condominium unit in Florida.  Not only will the insurers refuse to provide building ordinance coverage on older buildings, which may be included in appraisals, but you as the unit owner will also be assessed for any ordinance or law changes requiring it to be in accordance with the Florida Building Code (FBC).   If a hurricane comes through and damages your building, you may be assessed again over and above all other assessments to comply with the FBC when repairing your building. 

BUILDING ORDINANCE COVERAGE – WITH THE Condition of the building, you may be required to purchase this coverage


Building ordinance or law coverage responds to losses which result from the enforcement of ordinances or laws regulating demolition and/or restoration of a building following its physical damage. Building Ordinance Coverage is excluded under all policies, unless it is specifically added by endorsement.  Ordinance or law coverage does not include loss due to an ordinance or law with which you, the insured, was required to comply before the loss but failed to comply.  Let’s look at each of the building or law coverage ordinances which are offered, before going into the building definitions:


Coverage A – Loss to the undamaged portion of your building.   Since the undamaged portion of a building will also suffer a loss in value if the law or ordinance requires demolition, Coverage A covers the loss in value of the undamaged portion of the building, only. (This coverage is not subject to a separate limit of insurance because it does not increase the limit of insurance applying to the building)


Coverage B – Demolition Cost – this covers the costs to demolish the undamaged portion of the building. (This coverage is subject to an additional limit of insurance. If you choose, your appraiser may include the actual cost of demolishing your building)


Coverage C Increased Cost of Construction.  This covers the increased expenses to repair, replace, reconstruct or remodel the damaged or undamaged parts of the building so that it complies with current building codes relating to land use laws or ordinances. (This coverage is subject to an additional limit of insurance.  Again, similar to coverage B, your appraiser may include the actual cost of bring your building up to code or law).

These three coverages may be combined into one specific limit which shall apply.


Your policy will stipulate that the insurer will not pay the full amount of any loss if the value of covered property, at the time of loss, times the coinsurance percentage shown, is greater than the limit of insurance provided for the property.  Then you will see a long definition of how it is calculated.


Coinsurance usually is applicable to partial losses.  Let’s face it if you suffered a total loss to your building, you would receive the face value of the building limit shown unless prohibited by law.   You are still a coinsurer if you if when you are rebuilding your building values for the new value are in excess of the previous building.  But, in most cases, you will suffer a partial loss rather than a total loss.


The coinsurance formula is one of simplicity.   The amount carried is divided by the amount required and multiplied times the loss amount.


Let’s consider a $2,000,000 replacement value.  Although you are currently carrying a 90% coinsurance clause, you elect to insure your building for $1,600,000 on a replacement cost basis.

$ 1,600,000 is the current amount you are insuring

————————————————————————       or 89%

$ 2,000,000 x 90% = $ 1,800,000 which is the amount required


Since you are insuring for 89% of the required replacement cost at 90%, the 89% will be multiplied against the partial loss which we will say is $300,000 for the purposes of the calculation.


89% x a $300,000 partial loss = $267,000 loss payment, less your deductible.


You then become a coinsurer to $33,000 ($300,000 – 267,000 = $33,000) on a partial loss.


Blanket limits of coverage as compared to listing separate amounts for each subject of insurance, may also assist in avoiding a coinsurance penalty.  This is because all your values are considered in the coinsurance determination rather that specifically making that determination for each building or each building and its property.






BASIC FORM – all that may be provided SHE and depending on the inspection and how solid the building is, no windstorm coverage may be provided – one can try however for a special policy through citizens Insurance in Jacksonville

The “Basic” causes of loss include the following:






      Explosion, including the explosion of gases or fuel within the furnace of any fired vessel or within the flues or passages through which the gases of combustion pass.  This cause of loss does not include loss or damage by rupture, bursting or operation of pressure relief devices or the rupture or bursting due to expansion or swelling of the contents of any building or structure, caused by or resulting from water. (Boiler and Machinery Insurance a/k/a Equipment Breakdown coverage is required).


Windstorm or Hail, but not including frost or cold weather, ice (other than hail), snow, or sleet whether driven by wind or not.  Loss or damage to the interior of the building or structure by rain, snow, sand or dust is not covered, whether driven by wind or not, unless the building or structure first sustains wind or hail damage to its roof or walls through which the rain, snow, sand or dust enters.  MAY HAVE TO BE INSURED SEPARATELY


Smoke causing sudden and accidental loss or damage.   Similar to the Broad form, the basic form does not include agricultural smudging or industrial operations.


Aircraft or Vehicles, damage by physical contact of an aircraft, a spacecraft, a self-propelled missile; a vehicle or an object thrown up by a vehicle into the described property, with physical evidence.  Also included is damage by objects which fall from an aircraft.    Damage caused by your own vehicles or those which are operated in the course of your business is not covered.


Riot or Civil Commotion which includes the acts of striking employees while occupying the premises and looting incurring at the time and place of a riot or civil commotion.


Vandalism meaning willful and malicious damage to or destruction of the described property.  Loss or damage from theft, except for building damage caused by the breaking in or exiting of burglars is not covered.


Sprinkler Leakage –If your building contains an automatic sprinkler system and the building is covered under the policy, the discharge or leakage of any substance from an automatic sprinkler system, including collapse of a tank that is part of the system is covered.

Sinkhole Collapse – Coverage is provided by the  insurer for loss or damage caused by the sudden sinking or collapse of the land into the underground empty spaces created by the action of water on limestone or dolomite.  (THE SCHOOL BOARD COULD HAVE PLACED A CLAIM UNDER THEIR INSURANCE IF THE REASON FOR THE SCHOOL FALLING IN THE HOLE MAY HAVE BEEN FROM THIS PERIL – THIS SHOWS THEY WISHED TO DO NOTHING FOR WHITE SPRINGS.)  I AM CERTAIN THEY WERE NOT PROVIDED FLOOD INSURANCE BUT THE DAMAGE WAS NOT DONE FROM MUD SLIDE OR RAIN.


Coverage under the policy does not include the cost of filling sinkholes or the          sinking

or collapse of land into man-made underground cavities.  This is the reason it is         highly

important to have an engineering survey on land you may consider purchasing as   well

as to secure the historical aspects on land.   Some land may have had man-made

mining tunnels, or other tunnels and wells made before the turn of the century.  In

most cases the sinkholes usually are due to water action.


Volcanic Action – Coverage is provided for the direct loss or damage which is a result of an eruption of a volcano when the loss or damage is caused by an airborne volcanic blast or shock waves, the ash, dust or particulate matter or a lava flow.


All volcanic eruptions which occur within any 168 hour period will constitute

a single occurrence or eruption.   This cause of loss does not include the cost to      remove

ash, dust or particulate matter which does not cause direct physical loss or damage

to the described property.



The aforementioned Basic Perils are applicable with respect to most commercial policies written including those policies called “Multi Peril” policies written in conjunction with state owned insurers such as “Citizens Property Insurance Corporation” in the State of Florida.


Karin for the blog

Taken in part from my Savvy Business Persons Guide to Property and Casualty Insurance





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