The True Cost of an Insurance Policy Is Not Just the Premium

Protecting an asset from physical damage is usually at the forefront of what type of insurance to purchase, but have you ever asked yourself what you might be missing?  Is the successful repair or rebuilding of an asset really the biggest and only concern?  The answer to this question is no.

Most sellers of insurance don’t look at the whole asset appropriately. Historically, agents are not very good at fully explaining the options that are available to protect a bank’s repossession or a failed investment venture.  Agents sell the minimum level of coverage that banks are looking for. Typically, a buyer doesn’t want to consider more coverage than the bank requires. When it comes to determining an appropriate level of coverage, the authority on what the insurance needs are should lie with the agent as opposed to the lender.

Consider this scenario: A large investment property is damaged by an extensive fire that requires significant repair to the building.  Reconstruction requires township/city/municipality approval before putting the reconstruction out to bid, all while the insurance company has 60 days to analyze your sworn proof of loss.  Realistically, construction starts 4-5 months after the damage occurs. With delays between insurance carriers and local government, it is expected to be completed in 12 more months, pending any further delays.  The leases you have in force with tenants all have an option to abate if significant damage to the building has occurred, and most tenants have exercised this right in their lease.

While you are dealing with this issue, what happens if the rental checks of tenants in your building stop?

This scenario is one of many seen in commercial insurance programs across industries, but is particularly important for real estate.  A properly structured and well-thought-out insurance considers the timeline to rebuild a structure after a devastating loss, and what your needs would be to pay your lending partner in your venture.

In the end, these problems can be fixed for pennies on the dollar.  The true cost of an insurance policy is not just the premium, but the premium plus the cost of uncovered claims.  Working with a professional who can help you understand the policy you are purchasing is the most effective way to protect an asset, not the bank requirements for insurance.  This helps you know that you can adequately recover from a worst-case scenario, and continue to hold an asset that was successful prior to a loss.


Matthew Maurer is a Certified Insurance Counselor (CIC) and a Senior Account Executive in the Property & Casualty Division of American Insurance Administrators, an Alera Group Company. Matthew has served at AIA for the past 15 years specializing in real estate, construction, manufacturing, retail, distribution, professional services, trucking, health care, and educational institutions. His responsibilities include managing client relationships, advising clients on their risk management and insurance coverage needs, and building custom risk mitigation strategies for commercial accounts.