GROUP BENEFITS
COMMERCIAL
BUILDINGS
BY: billy-joe checko
INSURANCE BROKER,
WAYPOINT INSURANCE
Insuring To Value:
Commercial Buildings
A
n estimated 70 percent of
commercial buildings in
Canada are underinsured
by up to 40 percent of
replacement cost value,
according to Risk Management Services.
Setting a value for a commercial building
can be difficult, especially since there are
several valuation methods available:
1. A depreciation value reflects the
actual value of the building, beginning
with a replacement value and deducting
depreciation based on the building’s age
and condition.
2. An appraiser can provide you with a
market evaluation, usually used for the
sale of a property.
3. Property tax assessments provide a
value on which your property taxes are
based.
While all of these valuation methods
are accurate for their intended purpose,
none of them will provide you with a
true replacement cost calculation. A
depreciation cost can be valuable when a
building owner doesn’t want to (or can’t)
replace a structure in the event of loss,
whereas the market evaluation and tax
assessment are accurate only for their
intended purposes—selling a home and
paying property taxes, respectively.
A replacement cost insurance policy
aims to get you back to where you were
30
before the loss, so what a building is
worth to the CRA, a prospective buyer,
or a municipality is irrelevant. What is
important is what it will cost to rebuild
your building to where it was before the
loss. There are two more methods of
valuation specific to your insurance:
1. Your insurance broker may have
evaluation tools available that can assist in
setting an appropriate replacement value.
2. Your best and most accurate option is an
insurance appraisal, which will evaluate
the building based on the cost to rebuild
the structure at current market prices.
It is important to make the distinction
between new construction and rebuilding
costs. Costs associated with rebuilding
are often higher than new construction
or original construction costs. Rebuilding
a structure after a loss needs to be done
in a quick time frame, around existing
infrastructure, and includes the removal
of debris as well as meeting current bylaw
requirements. These additional costs are
reflected in an insurance appraisal.
How does underinsuring a building, or any
property for that matter, affect the owner
in the event of a loss? For a total loss, the
limit on the insurance policy will be paid
but will be insufficient to rebuild the
building. Where it becomes a little more
complicated is in a partial loss.
Most insurance policies contain a
co-insurance clause that requires you
to insure to replacement value. A co-
insurance clause states that an insured
must insure the property to the full value
(or a stated percentage, usually 90 percent)
or the insured will participate in paying
for a partial claim to the extent they are
underinsured.
This is a lot to consider when valuing your
building for insurance, and it’s easy to
see why so many commercial buildings
are underinsured. To prevent this, it is
critical to set an accurate limit of coverage,
and the best way to ensure a proper
value is to obtain an insurance appraisal
from an accredited appraiser. Unlike
market appraisals, insurance appraisals
take all of the contributing factors into
consideration and make sure that in the
event of loss, your insurance limit will be
correct. +
Billy-Joe Checko is a commercial
insurance broker based out of the
Nanaimo Waypoint Insurance office. A
passion for business inspired him to
become a commercial broker. Having
been in business for himself, knowing
what it is like to pay commercial insurance
premiums, Billy-Joe looks to provide
value that exceed his clients expectations.
To contact Billy-Joe, or any one of our
Waypoint brokers, please call 310-8442
or visit us online at waypointinsurance.ca