Disasters Raising Questions of Insurance Adequacy



Property Loss

For example, while much of the damage in the Oklahoma City disaster involved federal property—not “insured” in the conventional sense—extensive damage to properties located quite a distance away, including: furniture, records, files, supplies, machinery and equipment, and property belonging to employees, privately insured, also resulted. In many cases, coverage was adequate to cover losses involving partial repairs but, in cases involving more serious damage, problems were encountered due to valuation problems and rebuilding requirements.

For any buildings damaged in a catastrophe to the extent that they must be demolished, the loss would be the total actual cash (depreciated) value of the building plus the cost of demolition and removal of the debris. If rebuilt, replacement cost insurance (a built-in feature of most homeowners and business owners policies but an optional feature with other commercial property policies) would be needed to pay the total cost to rebuild at present prices, plus any demolition and debris removal costs.

Moreover, if building, zoning or environmental ordinances or codes required demolition of undamaged portions of the building or enhancements to bring it to current code requirements, ordinance or law coverage (an infrequently purchased but highly desirable endorsement for property insurance policies) would be needed to pay these additional costs. Examples could include a building code requirement that the restored building be sprinkler equipped or be handicap accessible, when the original building did not contain these features. (See Adjusting Today , Ordinance or Law edition.)


A common problem in all of these disasters has been inadequacy of the insurance to cover costs fully. In the California wildfires, rebuilding costs of the dwellings destroyed in the fire proved in case after case to require much more than the amount of insurance available. In the absence of an up-to-date insurance appraisal, “guesstimates” of property value tend to underestimate the present- day rebuilding costs and the value of personal property, particularly if building or zoning ordinances apply and require demolition of undamaged portions of the building or extensive upgrade in construction on rebuilding, or both.

The common practice of purchasing insurance to meet mortgage loan or coinsurance requirements, rather than the full actual loss potential, works well in most partial loss situations, but in disasters of the magnitude considered here, the insurance has been proven time and again to be substantially below the amount needed to cover the loss fully. Values and replacement costs must be reviewed regularly. In addition, business interruption exposures need to be fully projected and insured accordingly.

Be wary, also, of reliance on real estate appraisals or “book value” figures as a basis for setting the amounts of insurance. Their basis for valuation may be at odds with the factors used in an insurance appraisal, particularly in the areas of depreciation and inflation. In many cases “book” depreciation will be accelerated for tax purposes and will not have been adjusted upward for inflation, giving an artificially low number as compared with “insurable value.” Also, quantities of the contents may have been written off as expenses without ever having gotten onto the books as assets, again giving an unrealistically low picture of actual insurable value.

Blanket Insurance

For insureds with both buildings and personal property, or with multiple premises, either at the same or separate locations, or a combination of any of these, purchase of “blanket” insurance over all of the property is recommended if the insurer has not issued a margin clause (discussed later). While the rate will be slightly higher (usually between 5 and 10 percent more) with blanket insurance than with “specific” insurance on each separate item of property, the flexibility of the blanket insurance will more than offset the higher rate.

With blanket insurance at a single location, the full amount of coverage is available to cover any property insured. Whereas with scheduled coverage, the insurance on one item might be exhausted while there is still unused coverage on another item, the entire amount of blanket coverage is available without regard to the distribution of the loss among the items included in the blanket item of coverage.

With two or more locations covered on a blanket basis, the...