Insurance: Are You Underinsured?

Mounted on excavators or other machines mobile shears give scrap processors the cutting edge they need when processing ferrous and nonferrous material.

Reviewing your insurance in detail may be as fun as a trip to the dentist, but it is essential to do so for your financial health.
   In a recent review of property losses in the RecycleGuardsm program, a troublesome trend has surfaced. Many of our insureds are carrying inadequate limits of insurance on their buildings, contents, and equipment.
   To understand this trend, consider what has happened to the price of materials that would be used to replace your structures and/or equipment: Steel prices are up 35 percent. Lumber now costs 20 percent more. Drywall is 21 percent more expensive, while concrete is up 11 percent.
   Have you taken these increases into account when considering what it would cost to rebuild your structures or replace your equipment? Also, have you made any upgrades or renovations to your property that increased the property’s value and, hence, its insurance needs?
   To illustrate this problem, consider these details from a recent RecycleGuard loss:
A belt on a conveyor system broke, igniting a fire and causing damage to the conveyor and the building. The insured’s policy included $600,000 of replacement coverage for the building and $450,000 for the baler and its conveyor system (subject to 90 percent coinsurance).
   And what was the actual replacement cost of this property, as determined at the time of the loss? It was $750,000 for the building and $650,000 for the baler. In other words, the insured’s coverage came up $150,000 short on the building and $200,000 short on the baler.
   Now, let’s look at the elements that come into play when adjusting a loss. First, there’s the valuation, which determines the current replacement cost or actual cash value of the insured property. In this case, we had replacement cost, which contemplates repair or replacement of property without deduction for depreciation.
   Second, there’s coinsurance. In its simplest terms, coinsurance is a penalty that’s applied if the policyholder does not maintain a limit of insurance equal to the percentage they chose (in this case, 90 percent), applied against 100 percent of the cost of replacing the property. To illustrate, let’s go back to our loss example above:
   The baler had an insured limit of $450,000. The insured should have had a limit of $585,000, however, based on the baler’s real replacement cost of $650,000 multiplied by the insured’s 90 percent coinsurance level ($650,000 x 0.9 = $585,000).
   Since the insured did not have adequate insurance, we must then calculate the coinsurance penalty. We determine that by first dividing the insured’s actual coverage amount of $450,000 by the required coverage amount of $585,000, which yields a penalty percentage of 0.769.
   We take that percentage and multiply it by the amount of real damage to the baler/conveyor system, which was $155,000 in this case. 
   This calculation—0.769 x $155,000—yields a total of $119,195 to be paid by the insurance carrier for the loss and a coinsurance penalty of $35,805 ($155,000 - $119,195) to be absorbed by the insured.
   If nothing else, this example shows the very real cost of carrying inadequate insurance on your property.
   The key follow-up question is: What would the insured have paid to have the proper amount of insurance in the first place?
   Using our baler example again, let’s assume an insurance rate of $1 per $100 of value. The insured’s coverage level of $450,000 would have translated to a premium of $4,500. If, instead, the insured carried the required limit of $585,000, the premium would have been $5,850—or $1,350 more than the insured’s actual $4,500 premium. So, the policyholder could have avoided the coinsurance penalty of $35,805 by simply paying $1,350 more to have adequate coverage on the baler.
   What should you do to ensure that you have adequate coverage and to avoid similar coinsurance penalties? These steps can help:
• Review your current insurance values
• Take an inventory of your property to make sure it is all properly insured
• Consider having a formal appraisal of your property to make sure it is valued accurately
• Contact the manufacturer of any fixed equipment you own—such as balers, shears, shredders, and so on—to obtain current replacement cost estimates
• Work with your broker to update your property schedule to reflect changes
Take some advice from this insurance veteran: You don’t want to be caught with inadequate insurance after a loss, so please make sure you are insured properly before something bad happens. 

—Monica McNally, senior vice president of RecycleGuard/Willis of New Hampshire Inc. (Portsmouth, N.H.)

The information contained in this document has been prepared and/or assembled by Willis RecycleGuard for informational purposes only and is not intended to provide legal advice. Readers should not rely on this document or act upon any of the information contained in this document without first consulting competent legal counsel.