Key Takeaways
- Always purchase replacement cost, open peril coverage with agreed value endorsements to maximize claim payments.
- Layer liability protection: entity structure, CGL, umbrella, and specialized endorsements.
- Catastrophe insurance (flood, earthquake, windstorm) must be purchased separately and included in acquisition underwriting.
- Annual coverage reviews and gap analysis prevent uninsured losses from commonly excluded perils.
This lesson recaps the insurance structures and frameworks from Track 1: policy types, valuation methods, liability layering, catastrophe coverage, and portfolio insurance program design.
Insurance Structures Recap
Four insurance layers protect investors: property, liability, supplemental, and business interruption. Replacement cost coverage is essential—ACV deducts depreciation. Coinsurance penalties reduce claim payments if coverage is below the required percentage. Open peril policies provide broader coverage than named peril. CGL at $1M/$2M per property with a $5M+ umbrella provides the liability foundation.
Specialized Coverage Recap
Flood insurance through NFIP has maximum limits requiring excess private coverage for higher-value properties. Earthquake deductibles run 10-20% of coverage amount. Blanket portfolio policies save 15-20% over individual policies. Gap analysis identifies commonly missed coverages: sewer backup, ordinance or law, and equipment breakdown. Total insurance costs typically run 3-7% of EGI.
Key Takeaways
- ✓Always purchase replacement cost, open peril coverage with agreed value endorsements to maximize claim payments.
- ✓Layer liability protection: entity structure, CGL, umbrella, and specialized endorsements.
- ✓Catastrophe insurance (flood, earthquake, windstorm) must be purchased separately and included in acquisition underwriting.
- ✓Annual coverage reviews and gap analysis prevent uninsured losses from commonly excluded perils.
Sources
Common Mistakes to Avoid
Purchasing insurance based on market value rather than replacement cost valuation
Consequence: Market value includes land and depreciation adjustments; replacement cost reflects the actual rebuild expense—underinsurance triggers coinsurance penalties
Correction: Insure all structures at full replacement cost as determined by a Marshall & Swift or similar cost estimator, not the purchase price or appraised value
Treating insurance as a commodity and selecting solely on premium cost without comparing coverage terms
Consequence: A cheaper policy may exclude flood, named storms, or loss of rents—exposures that can exceed the total premium savings by orders of magnitude
Correction: Compare policies on coverage scope, exclusions, deductible structure, and carrier financial strength (AM Best rating A- or better) before price
Test Your Knowledge
1.What is the consequence of carrying property insurance below the coinsurance requirement?
2.What is the maximum building coverage available through the National Flood Insurance Program for commercial properties?
3.Which coverage is typically NOT included in a standard commercial property insurance policy?