One of the most difficult questions self-storage owners and operators face is how to determine what property values to use when seeking insurance coverage for their facilities. This should be addressed when purchasing a policy, not after it has been issued or a loss has occurred. Most commercial properties are valuated in different ways and for various purposes, which may not have anything to do with insurance. Some of the most common types of valuation are:
- Tax assessment valuation, which is usually established by a local or state taxing agency. It is generally used to determine the amount of tax a business will pay.
- Accounting valuation/book value, which might be used in internal accounting and annual reports published by a company.
- Market/sale value, which represents the price at which a property is sold to another owner.
- Repair/replacement cost value (RR), which represents what it would cost an owner to completely replace a facility with all new construction, business-personal property, etc.
- Actual cash value (ACV), which is usually defined as replacement cost less depreciation.
Insurance policies are designed to indemnify an insured party after a loss. In other words, the insurance company is supposed to return the business to where it was before the loss occurred. For this to take place, adequate values must be written into the policy when it is issued.
Most commercial policies are based on RR. This is an attractive approach for the self-storage owner, as it means facilities are rebuilt with new materials after a loss. But some policies still carry ACV provisions. An ACV valuation will generally result in a lower insurance premium, as premiums are based on the values assigned to a policy. In the case of ACV, the insurance company will take depreciation of the facility into consideration when paying the loss, so the total value is less.
To adequately continue a business after a loss, however, RR valuation is probably necessary. It ensures damaged buildings or equipment are replaced with new supplies and rebuilt according to the latest building codes. It may cost a bit more in insurance premiums, but when it comes to rebuilding, a higher-value approach is preferable.
What to Insure
What items should be covered in the insurance policy? There are two general categories of property considered when insuring self-storage sites:
- The building/physical site includes all of the storage buildings, office, manager’s apartment and any other structures on the site. It should also include all fences, security systems (gates, cameras, etc.), and the concrete slabs on which the buildings are constructed. Coverage for debris removal and architect fees for rebuilding are also considered here. Since land is not insured under most policies, its value should not be included.
- Business-personal property generally refers to office equipment, computers, lawn mowers, snow-removal equipment, golf carts, and any goods for sale such as locks, boxes and packing supplies.
Some commercial insurance policies contain provisions for “coinsurance.” In general, this means the storage owner must insure his property for some percentage (usually 80 percent) of the facility value at the time of loss. If he meets this requirement, the entire loss—less the insurance deductible—will be paid. If he does not, it's possible he won't recover the full amount of the loss. In essence, he becomes a "co-insurer" of the deficit.
Most policies designed for commercial businesses also contain provisions for loss of income. The purpose of this coverage is to keep a pre-loss income stream flowing to the storage owner while his facility is being rebuilt after a loss. Some examples of loss of income and related coverage are:
- Loss of Rents—If a portion or all of your facility is destroyed, your policy may pay you the income you were receiving before the covered loss until you re-open your site. This is a critical coverage that should be included in any self-storage owner's policy.
- Loss of Use—This coverage also indemnifies an owner for loss, but it's usually more applicable to manufacturing plants. If a site isn’t functional after a loss, the sale of manufactured goods will suffer, since products can’t be produced.
- Extended Period of Indemnity (EPI)—EPI recognizes your facility occupancy on the day you re-open will probably be lower than on the day the loss occurred, and it will take some time to ramp up business to previous levels. EPI indemnifies you by making up the shortfall in income. It applies after loss-of-rents coverage and is usually only for a fixed period of time.
- Extra Expense—This coverage helps with expenses you incur after a loss to keep the business going.
When considering values for insurance purposes, conduct a thorough analysis of your loss-of-income exposures. Business-insurance valuation isn’t just about determining the costs to replace fixed assets. It also involves a thorough review of the potential loss of operational revenues.
Getting the Numbers Right
There are several important steps to take when determining values for your commercial insurance policy. First, consult a local builder or one of the companies that specialize in self-storage construction. Give them the size, age and type of your current buildings. Get a rough estimate of the costs to rebuild in today's market. Don’t forget to include the value of concrete slabs, fencing and security items.
Several national firms offer assistance with construction-cost analysis. You can find them through the Internet or other industry resources. Most provide information on the cost of materials, labor and other anticipated expenses in your area.
Consider whether your location might be subject to a catastrophic loss involving other businesses. For example, if your site is in an active hurricane zone, the demand for materials and services after a serious storm may increase the costs to rebuild. Particularly note the time it will take to get back into business. If you have to wait for construction, it will have a serious impact on your income stream.
Update your values with your insurance agent annually as part of your policy's renewal. In particular, review your loss-of-income exposures and be sure your policy covers all potential losses.
Aside from making sure the business insurance you buy is designed specifically for self-storage, the most important decision you will make involves writing the right property values into your policy. With proper preparation, you can use insurance as a tool to adequately protect the assets of your business.
Mike Gilbert is the vice president of commercial insurance sales for Bob Bader Co., a general insurance agency based in Indianapolis. The company offers insurance products specifically designed for self-storage, including building owners' policies and tenant-property insurance. For more information, call 888.223.3726.