Community Association Tip of the Week – “Insurance to Value”


Insurance to value (ITV) has always been a concern with us and we now believe it is more important than ever to help our clients understand the insurance coverage required to rebuild.    Recent events such as the increasing severity of weather events, disasters like the earthquake in Japan and skyrocketing construction costs illustrate the significance of ITV.   We were surprised to learn that an estimated 75 percent of commercial businesses are underinsured by an average of 40 percent or more.   This is important because underinsurance can greatly impair, or even bankrupt a business that is trying to recover from a major disaster.   

We would expect to see similar statistics for Condominiums and Townhomes with respects to being underinsured.   For illustration purposes let’s use a 200 unit condominium association that has been insured for $30 million by one agent and carrier for many years. A fire causes a complete loss and it ends up costing $40 million to rebuild.   The carrier will only provide $30 million in the rebuilding efforts so the $10 million not covered will be equally assessed to the 200 unit owners.  Many carriers have 125% extender endorsements but it is important to note these have clauses that state if the property is not properly insured to value (100%) then the endorsement is null and void.  We estimate that over 90% of CC&R’s state that Board of Directors are mandated to carry a property limit for the 100% Full Value Replacement Cost with no deduction for depreciation or coinsurance. This is why we want to help provide our clients with the information you need to make sure the properties you manage or own are properly insured.


There have been several devastating weather events in recent years.  Some of these were unprecedented and unexpected but for the year ending 12/31/11, the United States alone experienced $38 billion in insured losses.    Many experts are predicting the severe weather to continue.    These events cause the need for communities to rebuild which causes an increase in demand for building materials and labor.   To provide you with examples the following materials rose significantly for the fifteen month period 4/1/2010 to 7/1/0211: 

Copper Pipe  26.5%           Drywall           5.5%                      Steel Rebar                   15.8%

Plywood        11%              Lumber        11.7%                      Structural Steel              13%

 Construction costs are increasing and buildings constructed as recently as two years ago would not be able to rebuild for anywhere near their original costs.  Please keep in mind insurers evaluate the cost to rebuild properties, not its current resale value.   Even though the commercial real estate market has plummeted, property insurance costs may not have followed suit because of the increasing cost to replace property. It is always important to understand that Real Estate value have very little to nothing to do with the cost to replace and/or repair damaged property.

 A good percentage of today’s blanket Master policies include what is known as a 125% extender endorsement.  This endorsement essentially states that whatever the limit is on the declaration page (i.e. $40,000,000) that there is an additional 25% (or in this scenario $10,000,000 more for $50,000,0000 total) of coverage at the time of loss.  It is our understanding that all of these endorsements mandate the Association must already be insured for 100% of the best estimated insurable value in order for it to be valid.  Due to this we want to caution you that some policies may be underinsured (in the above example let’s say for a limit of $32,000,000) to drive down the premium and then assume the 125% extender will increase the total coverage back to the $40,000,000 in the event of a total loss.  Per the above, it is possible this may eliminate the benefit of the 125% extender. 

We hope that from this tip of the week you realize ITV is a critical element of any well-constructed property insurance program.  Our commitment is to always keep you up to date on information important to homeowner associations.   If you have any association that we do not insure but would like us to review to see if the current property limit is adequate we would be happy to do so free of charge.       

For more information on Commercial, Homeowner, Personal or Workers Compensation insurance please call our office at (949) 487-6131.

 **The information contained in this HOA Tip of the Week is for information purposes only and is not specific legal advice or a substitute for specific legal counsel.   Readers should not act upon this information without seeking professional counsel.  **

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