This Hurricane Season, Stock up on Canned Goods and Review Your Property Insurance Policy
by Philippe Lieberman

As hurricane season gears up in South Florida, it is important for commercial property owners to review their insurance policies. Most policies contain coinsurance provisions, which apportions the loss covered under the policy between the insured and the insurer. The apportionment is made according to a fixed percentage of the property’s insured value. Insurers generally require an insured to carry insurance of at least 80% of the property’s value. If an insured does not maintain the coinsurance requirement, he or she will likely be penalized at the time of loss.
For example: X owns a commercial property insured for $800,000 but is actually worth $1 million. The coinsurance provision of the policy requires that X insures the property for at least 80% of its value. If the building suffers damage in a hurricane, X will not suffer a coinsurance penalty because he is in compliance with the policy requirements. However, if X insures his property for $600,000, he is not satisfying the 80% requirement of the coinsurance provision in the policy. Accordingly, in the event of a loss, X will be penalized. X’s insurance company will reduce his loss settlement proportionately to the percentage that he was underinsured. This penalty can significantly reduce X’s recovery from the insurer.
This situation sometimes arises when commercial property owners, seeking to save money on costly insurance premiums, take an extremely conservative approach to valuing their property. Or, in a market, like South Florida, where property values are currently rising, the valuation may change significantly in a period as short as six months.
Commercial property owners often ask, “should I spend the money on a professional appraisal?” The answer may depend on the type of commercial property. The owner of one stand-alone store may not want to spend money on a costly appraisal because the loss in the event of a storm, even if the property is undervalued, would not be substantial enough to warrant the cost. However, the owner of a large office building or several strip malls might want to consider engaging an appraiser to get a true value of the property going into hurricane season.