How to help your commercial clients align coverages with rising insured values

Steep inflation means brokers should consider approaching commercial clients about mid-term adjustments in insured values.

“We’re definitely seeing more awareness around inadequate insurance-to-value ratios,” said Paul Gallately, assistant vice president of risk control with Travelers Canada.

“It comes down to understanding what the replacement cost is from an insurance perspective, and the difference between that and a regular construction project or market value.”

Normally, such reviews are annual, and only take place mid-term if a client makes an acquisition or installs a new manufacturing line that significantly hikes a property’s value, said Bernard McNulty, chief agent and head of claims, Allianz Global Corporate Specialty.

But inflation’s now extreme enough that if a client manufactures a particular product, delivers a particular service, or uses critical components that have jumped in value, mid-term values for insurance may need to be adjusted.

“The price of steel has gone through the roof, as has copper,” McNulty said. “Any precious metals they use in their manufacturing, and that have limited accessibility, can be really prone to value changes.

“If that finished product incorporates all those precious metals, and were sitting on a warehouse floor a year ago at $1,000, that same finished product now could be worth $1,600. And if you have thousands of warehouse [square feet], that’s where the value shift changes.”

He suggested brokers consider tools like margin clauses to give latitude to the values reported.

“What it provides is, even if there was a case of modest under-insurance, we would still pay 100% of the claim,” McNulty said. “The last thing anybody would want [is] a situation at the time of claim where a client was underinsured and we couldn’t pay the whole claim. That would be a very difficult conversation with the client.”

To reduce the likelihood of tough conversations, brokers need to help clients understand how replacement cost is determined, said Lanny Hoang, managing director of construction and oil & gas with Travelers Canada. He added he often sees clients providing a market valuation, or a value, based on a construction project.

“Market value isn’t necessarily the full replacement cost. They have very different determining factors,” he said. “If you’re on a construction project, it’s a newly-built building, and those costs are based on several factors, including if a contractor has had time to plan and purchase materials to suit their schedule.”

But if it’s an older building on a site that’s now less accessible because of adjacent construction, replacement costs are likely to be higher.

“It’s not necessarily a big impact as long as there’s proper access,” Hoang said. “But if there is a situation where there’s limited access, that makes it more challenging.”

Feature image by iStock.com/Marilyn Nieves