Here’s a question we hear from property owners: “I only paid $500,000 for the building, so why would I insure it for $800,000?” The answer is that what your building is worth and what it would cost to rebuild it are two completely different things. Your insurance isn’t primarily concerned with what someone would pay to buy the property. It’s concerned with what happens if the building burns down and has to be rebuilt.
Imagine buying an older commercial building for $500,000. Part of that purchase price includes the land, and the building may have been purchased below its replacement cost. Now imagine a tornado completely destroys it. You’re not shopping for another used building you may be hiring contractors to rebuild yours from the ground up at today’s prices. That means new materials, current labor rates, debris removal, permits, and other construction expenses.
This is why an insurance amount that looked perfectly reasonable five or ten years ago may not be enough today. Construction costs change, and buildings get improvements such as new HVAC systems, roofs, electrical work, additions, and interior renovations. If the insurance amount doesn’t keep up, the property owner could potentially have a significant problem after a major loss.
Commercial property owners should periodically review their building values rather than simply renewing the same amount year after year. If you haven’t looked at yours recently, let us run an updated replacement-cost estimate. Finding out you’re underinsured takes a few minutes today. Finding out after your building burns down is a much more expensive lesson.
Stay Tuned For Other Great Reads In This Month’s Newsletter
- The $10,000 Insurance Audit Surprise: How Contractors Can Avoid It!
- Your Business Is Growing But Has Your Insurance Grown With It?
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