One of the greatest unknowns that is nearly impossible to predict when underwriting a commercial real estate deal is whether a catastrophe will occur at some point during the business plan. If a catastrophe were to occur, you need to understand how to address any damages in a timely manner. Depending on the level of damage, you may be required to submit an insurance claim.
A commercial property insurance claim entails restoring the property to the pre-loss condition within the limits of the insurance purchased, while also maintaining the business during the time needed to rebuild or repair the property.
Here is a general overview of the process:
Some sort of catastrophe occurs: Examples are a natural disaster (hurricane, flash flooding, tornado, intense storm, etc.) or a fire.
Mitigation of damages: You are required to protect the property from additional damages to mitigate the extent of physical and economic losses. This means you may need to make temporary emergency repairs. For example, any window, door, roof, or other opening must be covered so that rain, animals, or people cannot enter the property and do further damage to the property.
Evaluation of coverages: You will want to review your insurance policy to understand the terms and conditions, including coverage limitations, valuation methods, time limitations, and your duties and responsibilities for filing a claim.
Valuation of damages, claim preparation, and documentation: Before anyone moves or removes anything, you want to document the extent of the damage. Take lots of pictures from many different angles of each damaged area and item. Write detailed descriptions of the damages that correspond with the pictures. Include when the loss occurred and any questions or concerns you have about potential hidden damage. There is no such thing as too much documentation. Additionally, obtain estimates and bids from licensed contractors for repairs or to rebuild. You will be required to submit a detailed itemized claim with expert reports and estimates to your insurer. This should include information about the property damage, as well as business interruption, loss of income, rents, etc., and extra expenses to continue normal operations. This report is commonly referred to as a Proof of Loss Statement.
Negotiations and settlement: Your insurer will audit your claim in detail and make any necessary adjustments based on your policy and their experts’ opinions.
Restoration of property and operations: Do not proceed with permanent work until you have reached an agreement with your insurer. Once a settlement has been reached, work may begin to restore the asset to its pre-loss condition.
Here is what your typical apartment property insurance policy will cover:
Property Damage, including the buildings, fixtures, machines, furnishings, raw materials, and inventory.
Business Interruption, which is intended to place your business in the position it would have attained, had the loss that caused the interruption not occurred. It should provide funds necessary to sustain your business while its operations are suspended as a result of damage caused by a covered peril. It typically pays the asset’s profit and continuing operating expenses, including payroll, for a specific time period.
Extra Expense, which covers expenses incurred in mitigating the business loss, or increased costs in continuing a business in the event of a catastrophe. It can reimburse you for money spent moving a covered business to a different location while the covered property is restored. It is intended to offset expenses associated with returning to normal operations. Equipment breakdown coverage is often available with this coverage and should be purchased if a customer’s business is dependent upon certain equipment.
Contingent Business Interruption is usually an extension of the business interruption coverage available in most commercial real estate policies. Contingent Business Interruption provides you with benefits to cover lost profits and extra expenses resulting from damage to a third party’s property, typically in four situations: (1) when the insured business relies on a third party to deliver materials or product; (2) when the insured business depends upon a third party to manufacture products; 3) when the insured business depends on a third party to purchase its products; and 4) when the insured business depends on a third party leader location to attract customers.
Ordinary Payroll Coverage provides for salaries as a continued expense, and a policy may provide coverage for you to pay hourly employees for a specified period of time while the business is closed.
Loss of Rents pays for lost income when a covered commercial property is made uninhabitable by a covered event and renters need not make rental payments. A lease or a rental agreement is helpful in estimating the amount of coverage needed.
Extended Period of Indemnity provides business interruption and extra expense benefits beyond the period of restoration defined in the standard business interruption policy.
Civil Authority coverage provides business income benefits when a civil authority prohibits access to the insured property due to direct physical loss or damage to other property. It is most commonly triggered during mandatory evacuations.
Utility Services – Time Element extends business income and extra expense insurance to protect against losses caused by interruption of services from a specified utility that provides a business with water, power, or communications.
Loss of Ingress or Egress provides benefits when, as a direct result of a covered peril, ingress to or egress from real and personal property is prevented.
Make sure you review your policy so that you know what is and isn’t covered.
Your policy states that your insurer is legally bound to process your claim and pay you what is owed from your damages in a timely manner. However, timely is a subjective term and commercial insurance claims can be delayed for many reasons.
Here are some tips to avoid some of the most common reasons why a claim would be delayed:
Your property insurance policy is packed with enough legalese to make anyone’s head spin. Even seasoned claims professionals routinely argue over business insurance policy interpretation. Still, it is critically important to read and understand what your policy covers, what it excludes, what it obligates you to do, and the process you must follow to settle your commercial property insurance claim successfully.
If you have gaps in your understanding of your policy, seek help from a business insurance claims professional, like a licensed public insurance adjuster. He or she can review your claim and advise you on how to achieve the maximum settlement under the terms of your specific property insurance policy.
You are required to make temporary emergency repairs to prevent additional losses resulting from the original damage. Any damaged window, door, roof or other opening must be covered so rain, animals or hooligans cannot enter and do further harm to your property.
This is a no-excuses step you must take, as your policy provides coverage for the cost. Prior to entering the damaged premises, contact your utility companies and fire department to ensure you are cleared to enter.
When you suffer insured commercial property damage, the burden of proof to substantiate and document your loss is squarely on you, the policyholder. To that end, there is no such thing as too much proof. Too little, though, can be the cause of significant delays in your commercial insurance claim process.
Before anyone moves or removes anything from your damaged premises, take photographs — many, from all different angles, of each damaged area and item. Write detailed descriptions of the damages you observe that correspond to the pictures. Include when the loss occurred, and any questions you have or reasons to suspect there may be hidden damage (for example, if smoke or soot permeated your walls, ductwork, machinery, etc.).
This initial documentation will be very valuable when you develop your Proof of Loss statement.
Some insurance carriers may encourage you to believe you have to select your repair professional(s) from the carrier’s list of preferred providers. Others may suggest you’ll save big money with their chosen providers. The fact is, you have every right to select the provider of your choice to do your contracted work.
Solicit several bids, and get everything you are promised in writing. Bid prices often vary, and those price differences often reflect the use of different materials and methods. Make sure the contractors you’re considering aren’t the lowest priced, but the ones best able to return your property to pre-loss condition.
Developing a proper Proof of Loss statement is one of the most important steps you can take to help your commercial property insurance claim process resolve successfully and without delays.
Your insurance company will send you a Proof of Loss form. Be sure the information you provide is accurate — and thorough. This is commonly where people unknowingly shortchange themselves on their claim settlement amounts, by providing insufficient information, documentation and evidence of their losses.
Organize the photographs and written descriptions of your damages to show what happened, when, where, and the resulting damaged property, inventory, equipment, personal property, etc. Provide copies of the estimates you obtained, and a value for the full extent of your loss.
Here, too, a licensed public adjuster can be an invaluable asset to help you avoid delays, calculate a fair estimate for the full extent of your damages, and maximize your commercial property claim settlement.
Filing a commercial property insurance claim takes time, effort, knowledge, determination, and communication. Throughout the process, it is wise to keep a claim journal, so when you need to look back at any of the process, you will have detailed notes about what happened, when, and who said or did what.
Wherever possible, communicate by email. If you are contacted by or speak with anyone by phone, note in your claim journal the date and time of the call, the person’s name and title, what you talked about, the conclusions reached, any additional steps needed, who is responsible for taking those steps, and any deadlines set. Get the person’s email address. Follow up the call with a written summary of the conversation, and ask him or her to review and agree to the information included.
Achieving a fair settlement for damages to your business can be challenging, stressful, frustrating, even infuriating. Take a deep breath and remind yourself: you have the right — and the obligation — to stand up for yourself and your business. The more organized, direct, respectful and firm you are throughout your commercial property insurance claim process, the better your chances of avoiding delays and achieving fair compensation for your loss.
The last thing I wanted to mention is how to work with your passive investors in the event of a natural disaster of fire. Check out this blog post here about the SOS approach: safety, ongoing communication, and summary.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action