Underinsurance is a concern for more than half of high-net-worth church and school properties. The most common cause of underinsurance is the failure to adjust policies in relation to equity, inflation, or wealth increment. But there can also be gaps in coverage and a lack of awareness around potential risks.
Proverbs reminds us of the value of good stewardship and safeguards: “Precious treasure and oil are in a wise man’s dwelling” (Proverbs 21:20). In this case, God has given resources to our churches, schools, and conferences; and good stewardship involves safeguarding those resources.
In order to keep resources where they are most needed, it is critical to understand inflation and property appraisal, the types of coverage, and the risks involved. That way, you can make sure your account executive prepares you before it is too late.
Replacement Value
It is essential to understand what replacement value is and how to accurately identify the amount. For our churches, schools, and conferences, the replacement value is what it would cost to replace your property and its contents if destroyed. Property insurance policies with replacement value usually cost more than actual cash value. That is because Adventist Risk Management, Inc. (ARM) is agreeing to provide money to replace your property with similar materials. Depreciation is not considered. Figuring out the replacement value of your property can be challenging, but it is vital to your policy as it is tied to your property coverage amount. Not having an accurate number can leave you underinsured.
The Key Costs That Influence Your Coverage
To avoid underinsurance, it is critical to have an accurate assessment of all the costs involved, including the following:
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Replacement cost is the amount of money it costs to rebuild your church/school property as it was before if it is destroyed or to purchase brand new items if your old ones are damaged or stolen.
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Actual Cash Value (ACV) is the amount equal to the replacement cost minus depreciation of a damaged or stolen property at the time of the loss. ACV is the actual value for which the property could be sold, which is always less than what it would cost to replace it.
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Agreed max is a clause in a property insurance contract stating that if an insured event occurs, the insurance company will pay either the amount to repair or replace the property or a set maximum. This maximum is called the agreed amount. In general, an organization pays a higher premium for a higher agreed amount.
Inflation, Underinsurance, and Property Appraisal
Inflation is a key factor in outgrowing your coverage and can lead to underinsurance. In recent years, the pandemic also prompted supply issues, driving the prices of key commodities to record highs and increasing the cost of construction. For example, lumber prices increased 114 percent over the 12 months ending in May 2021—the highest 12-month growth for which there are data. Similarly, in June of 2021, prices of iron and steel had increased by 73 percent over the prior 12 months.i Inflation has a direct effect on the cost of rebuilding your church, school, or conference. Even minor property repairs are causing the replacement value to exceed your property insurance coverage limit.
If your property is totally damaged, builders are taking full advantage of economies of scale and preferential prices on materials for new construction, and these cost savings are passed on to our organizations. The contractor may not have access to the same materials at the same price as several years ago. Further, the cost of materials, such as lumber and copper, as well as labor and transportation are at all-time high. It is wise to review your policy statement of value to make sure your properties are not underinsured.
ARM is working with an organization called ISO Verisk to conduct appraisals of church and school properties throughout the North American Division. These property surveys are being conducted at no expense to your organization. The survey information provides valuable risk management feedback to avoid injury and losses as well as to help update insurance information. These appraisals help ARM meet replacement costs to adequately cover your properties.ii
Replacement Cost
When you insure your church, school, or conference property to 100% of its replacement cost value,iii ARM will offer the benefit of extended replacement cost. This provision will pay beyond your policy limit should the amount at the time of loss not be adequate. In order to get a replacement cost settlement, ARM policies require that you insure your property to at least 80% of the amount of rebuilding cost. If you are insured for less than that at the time of loss, you may receive an actual cash value settlement. This settlement factors in depreciation related to the property’s age and condition.
Best Practice on How Not to Outgrow Your Coverage
The property coverage amount you choose is dependent on your specific needs. Updating your church, school, conference, or organization values to current full replacement value will help avoid significant out-of-pocket expenses that drain precious funds. In addition, give proper attention to other factors, including any other structures on the property, additional living expenses, and liability.
Updating your replacement values is good stewardship and helps us protect precious funds for when they are most needed. Contact your account executive and update your property values as soon as you can.
References:
i House, W. (2021, November 30). Housing Prices and Inflation. The White House. https://www.whitehouse.gov/cea/written-materials/2021/09/09/housing-prices-and-inflation/
ii Home | Adventist Risk. (n.d.). https://www.adventistrisk.org/en-US
iii Insuring Your Home to Full Replacement Value. (n.d.). https://pcs.marsh.com/us/insights/thought-leadership/insuring-your-home-to-full-replacement-value.html
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