Building Insurance Coverages
There are six variations of insurance coverages when it comes to insuring your building whether it be your personal residence or investment properties and they all have vastly different claims payouts. We have written this article in hopes of helping you understand your policy coverages better.
Three relate to the building coverage and three relate to the policy form or verbiage. Policy holders often forget that insurance is a legal contract between the carrier and the policy holder. When claims happen, payments are made according to the verbiage in the policy, thus it is very important to understand your policy contract.
Actual Cash Value
Otherwise known as “ACV” coverage, pays for the replacement cost amount minus any depreciation. This is essentially the property’s construction cost less physical depreciation (wear and tear). Meaning if your roof needs to be replaced after a fire and it was 20 years old, the amount you receive will be far less than what it will cost you to replace it.
These coverages provide the least amount of coverage for the insured and are most appropriate for people that do not intend to replace their property in the event of total loss. Owners of older buildings without updates may not have any other options than to obtain this coverage. This would certainly be something to consider when purchasing investment properties.
Functional Building Valuation
This may be listed in your declarations page as “FBV”. This coverage pays the amount it would cost to repair or replace using materials that are functionally equivalent to obsolete, antique, or custom methods and materials. For examples a 1910 Apartment building may have a beautiful wrought iron staircase. Should the building experience a fire where the staircase was destroyed the insurance carrier would likely pay to replace it with wood frame and carpet. This would be an example of a lesser cost but functional repair.
These policies are designed to provide replacement with “functionally equivalent” materials, while still taking into regard the architectural style that existed before the loss.
A primary advantage of using FBV coverage is that there is no Co-insurance penalty for underinsured properties. This eliminates the exposure of underinsuring the property and having to deal with a potentially costly coinsurance penalty.
Functional Building Coverage is a nice alternative to ACV on older properties that have had some updates.
This is the broadest coverage available. This pays the amount required to re-build the structure to its original condition before the damage.
It provides “comparable material and quality” in the event of a covered loss.
Most carriers will offer this for buildings that have had updated wiring, plumbing, heating and roof materials within the last 25 years. Some carriers will even offer it for longer time periods.
Property owners may also have “Extended” Replacement Cost coverage endorsements available to them, typically 125% “ERC” or “Guaranteed Replacement Cost” or GRC coverage. These coverages will require that the buildings are insured to value, usually 90-100% coverage is required.
Now that we have talked about the building coverages, we cannot neglect to mention the difference policy forms that go along with them. Basic, Broad and Special Form policies have vastly different coverages just as in the building coverages. The age of your property, the overall condition and/or the amount of updates that have been done to the property will dictate what coverage forms are available to you.
The difference between these coverage forms is often misunderstood by property owners and confusion on this topic can lead to large or unexpected gaps in coverage.
The Basic Form policy is the least comprehensive of the three coverage options. Basic Form policies only cover the specifically named perils. This means that if a coverage is not specifically named in the policy, there is no coverage. A Basic Form policy tends to be quite limited in scope and should be used with care. It is usually offered by carriers when the property is not in good condition, is under remodel, vacant or is old and without wiring, plumbing or heating updates.
Coverages included in a typical Basic Form policy are: Windstorm or Hail, Aircraft or Vehicle Collision, Riot or Civil Commotion, Sinkhole Collapse, Volcanic Activity,
Broad Form policies offer more coverage than Basic Form. They include coverage for all the same coverages as in a Basic Form policy plus several additional coverages which are expressly named. Like the Basic Form policy, a Broad Form policy covers only named perils. If the coverage is not specifically listed, it is excluded.
Coverages included in a typical Broad Form policy are the same as in the Basic Form policy plus the following; Burglary/Break-in damage, Falling Objects (I.e Tree’s), Weight of Ice and Snow, Freezing of Plumbing, Accidental Water Damage, Artificially Generated Electricity
Special Form coverage is the most comprehensive of the three options. Note that Special Form policies read differently than a Basic or Broad Form policy. In a Special Form policy, instead of the document listing what is covered, all perils are covered except for what is specifically excluded in the policy.
The Special Form policy reads opposite of a Basic or Broad Form policy. All unlisted perils are covered perils. This can be extremely beneficial to the insured and is the ideal coverage to have.
Common Special Form Policy Exclusions: Ordinance of Law, Power Failure, Nuclear Hazard, Intentional Acts
You should carefully read and review the coverages of your policy with your insurance agent. The type of policy you have will be listed on the declarations page of your insurance policy and should also be listed clearly on the insurance proposal or application you sign prior to binding your policy. Carefully review the covered or excluded perils. In any property policy, make sure you understand which risks are covered and which are excluded. Finding out what you do not have coverage for after a claim is never fun.
Many of the excluded coverage’s such as vandalism, theft, back up of sewer and drains, building ordinance, theft and loss of income can often be added on to the Basic, Broad and Special Form policies. Your agent will be able to tell you if they are available.