Insurance Policy Issues that should at least be addressed concerning a property insurance policy are as follows: 1. Replacement Cost / Price or Actual Cash Value (“ACV”)? 2. Is there a co-insurance clause, if so what percentage? 3. Is ACV paid if assets not replaced? 4. What is the timing of required action before ACV only paid? 5. Are intangibles covered (i.e. architect / engineering fees, studies, permits, legal, etc.)? 6. Are underground piping / foundations covered or excluded? 7. What are the loss mitigation requirements? 8. Are site improvements included / excluded in the policy? 9. Does “contents” include inventory at all stages of production, as well as supplies? 10. Is $ cost information on demolition and debris removal required? 11. Is the rate the same for buildings, site improvements and/or “contents”? 12. Is the policy named peril or “all risk”? What peril(s) is/are excluded? 13. Understand the appraisal clause and the arbitration clause. Information relating to the crossover between fixed asset accounting and insurance placement / loss settlement is discussed below. Also there is information concerning insurance placement and loss preparedness, as well as the updating of insurance values for completing the statement of values. Questions and Answers Crossing Between Insurance Appraising and Fixed Asset Accounting 1. For a new facility does the fixed asset schedule historic cost indicate the 100% amount of insurance to buy? a. Yes, if intangibles, underground piping and foundations are included in the calculation and covered in the policy. b. Be careful not to over-insure if such above cost elements are not included, with other cost elements not included as well. c. The construction may have been “fast track” meaning bids not received, and for other reasons the costs are higher than normal. If so, the historic cost if used to place the insurance may be overstated. 2. The subject facility is 10 years old, never having been purchased by an interim owner and having no additions or deletions, can the assets’ historic cost be “indexed / trended” to calculate the amount of insurance to buy? a. Yes, but do not use the general inflation rate, go to the Bureau of Labor Statistics website for the Producer Price Index, and/or use an outside cost service like Marshall Valuation, or other cost services. b. If there are additions and deletions one needs to work on the necessary fixed asset record changes before indexing / trending. c. Consider issue number 1 above as well. 3. The subject facility is 10 years old and it was purchased from the initial owner 5 years ago. Can we index / trend the cost information on the 5-year buyer’s fixed asset record to develop the amount of insurance to purchase? a. Absolutely not. The 5-year buyer’s fixed asset record is an allocation of purchase price to Fair Market Value in Continued Use, or perhaps even another value concept reflecting the economics of the subject business and/or assets in use. Such fixed asset information is a completely erroneous basis for indexing / trending (even by the most ably qualified appraiser). b. Therefore, a detailed physical appraisal of the assets is required for proper insurance placement. If lucky, the appraiser who did the purchase price allocation has some of this information in the file, that is, the current Replacement Cost New at the date of the 5-year sale. c. If fortunate and you have the fixed asset record of the original 10-year company, it can be used as number 2 above. 4. The subject facility is 20-40 years old, same owner all the time. How can the fixed asset record be used to develop the insurance placement number, and how accurate will it be? a. Likely the existing fixed asset record is worthless. b. A complete new physical appraisal is warranted. No other option is reasonable. 5. Same situation as number 4 above, with there being many interim owners after the initial owner. How can the current fixed asset record be used? a. Same answer as number 4 above. The fixed asset record for insurance placement purposes essentially is worthless. A new physical appraisal is warranted. Independence of the Appraiser The concept of independence of value information is critical. Some insurers have their own appraisers and provide value information. Is this value information “sacred” if there is an insured loss? Answer: Maybe and hope so. However, there is no guaranty that such will be the case. Further, some insurance company’s hire outside appraisers to do the work on their behalf. If so, should there be the same level of comfort in a loss situation as if the appraiser was employed directly by the insurance company? Again the answer is maybe and perhaps even less so. Loss Situation, Proof of Loss Preparedness - The Object is a “Fair and Timely” Loss Settlement One condition of a property insurance policy is that “it is the assured’s responsibility to prove their loss”. To prove certain subject assets are damaged or destroyed is not the only proof required. An inventory and asset detail of the subject assets is required. Further, the applicable value of the subject property (Replacement Price or Actual Cash Value) is the initial requirement of the assured. It is not the responsibility of the insurance company to develop the value of the subject assets. There may well be a disagreement between the assured and the insurer on the damage amount. 1. Assume the assets are destroyed. How can the necessary asset detail be developed to “prove a loss” from an asset detail perspective and value perspective? a. There may be information on the fixed asset record, there may be photographs of the subject assets, there may be information in the asset data file (if not also destroyed) that may be useful. However, if the assured does not have available appropriate asset details, the amount of settlement received may easily be 10% to 25% or even less than a “fair and timely” settlement. b. Without such information it may be quite difficult to develop detailed value information for the assured to fulfill its responsibility to present to the insurance company the “proof of value”. c. So how can one prepare to prove a loss? Have detailed information (initial purchase information, plans, specs, descriptions, make, model, serial numbers, features, etc.) on all the assets, have specific photographs of major assets, have copies of such critical information away from the facility site, in the cloud, or elsewhere. Have appraisal data. 2. Say more about “fair and timely” loss settlement. One can agonizingly wait to get a fair settlement that is not timely, such is not good but the insurance company is happy. Or one can get a timely loss settlement that is not fair, again the insurance company is happy. The idea is to get a fair settlement in a timely manner. Insurance Value and Loss Preparedness Updating 1. How often should insurance values be updated for the “statement of value” requirement of the insurance company and/or broker? Answer: Each year, but it depends on the applicable inflation rate and level of asset technology changes. As a technology example, consider the technology difference of assets used in a metal scrap yard vs. assets used to build computer chips. 2. Each year the assured should prepare a listing of the additions and deletions from both the fixed asset record, and hopefully from an insurance appraisal inventory listing. To do anything less is detrimental, and likely will get to a point when it becomes too difficult and a new appraisal inventory is appropriate. In the interim years between detailed inventories and reappraisals the assured may not have reliable information. 3. Regardless, with inflation at 2% per year it is suggested that updating be done every 5 to 7 years from preparation of a well based insurance appraisal / calculation. If inflation is 5% per year or more updating every 3 to 5 years is appropriate. Again it also depends on the technology level of the assured assets.