By Patrick Moreland, CPCU, CIC, CRM
Insuring for less than full value is a common problem among churches. By “value,” I mean the replacement cost of a building, not the depreciated actual cash value or the market value.
Underinsurance is common for several reasons:
Large, old and architecturally unique worship facilities are difficult even for skilled appraisers, and rarely are professional appraisers used when setting the limit of insurance. Additionally, these buildings likely would sell for little, which causes congregations to sometimes incorrectly assume that the limit of insurance should approximate the market value. The cost of making significant repairs from an insured cause of loss can easily be higher than the market value.
The agent is of little help in setting a value. An insurance agent might ask the trustees how much insurance they want to carry. Technically, it is the insured’s responsibility to purchase an adequate limit. Few religious organizations can do this without help.
Neither the agent nor anyone in the congregation reviews the limit periodically. Construction costs rise over time, and in the weeks and months following a weather catastrophe, can rise dramatically regionally.
The building was constructed partly by volunteers, which causes an understatement of the completed building’s true value. Will the volunteers be so gracious the second time? Are they capable of making major repairs — a task that often is more difficult than original construction?
The congregation wants to save a few dollars in premium or can’t believe building costs can be so high and refuses to buy what was recommended.
Potential for coinsurance penalty on smaller losses
Inadequate limits of insurance not only affect how much you receive for a total loss, but also can affect what you receive for partial losses. This is called “coinsurance.” If your insurance policy includes a coinsurance clause, you’ll need to set your limit high enough (usually 80 percent to 90 percent of full value at the time of loss) to avoid a penalty. You might also ask for an “agreed value” endorsement to override the coinsurance clause.
Regardless of coinsurance, you’ll be most secure if you insure to full value. Total losses are not frequent, but they do occur. You and your agent have done your congregation no favor by insuring your buildings to 80 percent of value — which saves you a little insurance money — if they burn to the ground.
A blanket limit can be an attractive option
If you own more than one building, consider insuring them under a blanket limit. This might cost a little more than insuring each building with a separate limit, but is comforting at the time of loss. In most blanket policies, the combined limit is made available for the damage to any one building. However, some insurance policies include a “margin clause,” which caps the amount available to one building to a specified percentage greater than the building’s scheduled value. Where used, these amounts typically range from 110 percent to 125 percent of the building’s scheduled value.
Building ordinances (codes) — such as those pertaining to construction type and handicap accommodations — restrict how you can repair or rebuild a heavily damaged building. This can lead to costly modifications or even force you to demolish undamaged portions. Elevators, sprinkler systems and requirements of the Americans with Disabilities Act are the most common. They probably are not included in the replacement cost of your building, and can cause you to be underinsured. The older the building, the more likely it is to be affected by code changes. Some policies automatically include a separate limit for upgrades and demolition, but the limit might not be adequate, especially for older and larger buildings. You generally can purchase higher limits.
Building codes vary by community. To learn more about the codes in your community, speak with your local building inspector.
You might go years — or a lifetime — without suffering a fire or severe wind damage at your church. Count your blessings, but remain insurance-wise. If tragedy strikes your church — as it does thousands every year — you’ll want the limit of insurance to be adequate and the claim to be resolved to your satisfaction.
It is in your best interest (and that of your insurance company) to insure to proper and full value.
Patrick Moreland, CPCU, CIC, CRM is Vice President — Marketing of Church Mutual Insurance Company in Merrill, WI. Commercial policies vary by insurance company, so please consult with your agent, especially regarding coverages for building code upgrades, demolition costs and blanket limits.