Insuring a standard cookie-cutter mini-mall building is one thing; insuring a 100-year-old historic downtown building, with legacy construction techniques and materials – and irreplaceable charm – is quite another.
For example, historic buildings often use construction techniques and materials that are no longer common, or even available at all. Also, older buildings tend to be in older neighborhoods. Some older structures don’t have the fireproofing expected of newer structures – which means antique buildings are at an elevated risk of fire spreading from nearby buildings. Not every insurance company or agent understands how to underwrite these kinds of properties and ensure the building owner is adequately protected.
The Problem with ‘Replacement Value’ Methodology
Typically, commercial properties are insured using the replacement value as a guide for setting policy premiums and limits. For insurance purposes, replacement value is the cost it would take to rebuild a structure with the same function on the site, if you had to rebuild completely. If you started with a 400-seat movie theater, for example, replacement value would cover what it would take to rebuild another 400-seat movie theater on the same site.
But that kind of underwriting doesn’t work for historic properties: If you have a historic movie theater that is 100 years old, with antique, one-of-a-kind trim, mahogany counters in the lobby, and a value collection of cinema posters and cinematic museum artifacts in the lobby, it doesn’t make sense to have a policy that limits you to replacing it with a generic modern McTheater design. But a poorly-written policy limiting you to “replacement cost value” will paint you into that very corner.
Take Specialized Construction Methods and Materials into Account
Standard commercial building insurance policies only cover building techniques where rebuilding costs fall within standard industry guidelines and where the construction materials and skilled labor are readily available. That means that unless you make allowances when you purchase your insurance policy, your coverage will not compensate you for the cost of skilled specialists and artisans you will require to recreate your special building – even if the unique character of the building was a key part of the building’s attraction and utility in the first place.
The alternative, actual cash value replacement, doesn’t make sense for antique buildings, either. That’s because if the building is damaged or destroyed, you only get reimbursed for the book value of the property, after a deduction for depreciation.
Naturally, depreciation on antique buildings can be substantial.
Simply insuring a property for its current market value may not work either: A property could sell on the market for much less than what it would cost to replace it.
Functional Replacement Cost Coverage
Another approach to insuring older properties is functional replacement cost. This is, at least cosmetically, a useful lower-cost option to insuring antique properties. A functional replacement cost would take an antique fixture and replace it with a modern fixture that accomplishes the same thing with modern materials but at a lower cost. An old solid oak or mahogany fixture, for example, may be replaced with a plywood fixture of similar appearance and function. It keeps costs down, but both insurers and landlords should understand that even though function and a certain amount of appearance is restored via functional replacement cost insurance, quite a bit of value is lost in the process.
For owners of antique buildings, it’s important to get actual historic replacement cost written into the policy. Not every carrier does this, and some agents who don’t regularly deal with these kinds of issues aren’t even aware of its importance. Generally, this kind of coverage means an on-site inspection and expert appraisal. Some carriers provide special underwriting for antique structures. We can help walk you through how to combine these coverages and apply them to your unique situation:
- Allowing for costs of artisan construction and restoration experts.
- Choice of valuation definitions
- Increased business interruption coverage to account for the time-consuming, meticulous process of restoring a damaged historic property.
- Registration, certification and regulatory expenses unique to antique or historic structures
- Compensation for loss of tax credits/deductions if restored or rebuilt property loses eligibility.
- Cost of upgrades under ‘green building’ standards
- Underwriting for museum artifacts and valuable collections, works of art and historic documents.
Underwriting Is Key
Specific underwriting issues vary substantially from property to property. The distance to the nearest fire station can impact premiums, for example. And some types of property are prone to containing machinery or components never encountered elsewhere. For example, a church or cathedral may contain a large pipe organ that would cost hundreds of thousands of dollars to replace. And stained glass works can vary widely in total value from property to property, even among buildings the same size.
If the contents of your antique building are pretty straightforward, this isn’t a difficult riddle to solve – standard underwriting techniques apply to insuring the inventory of, say, a bike store in an antique building that apply anywhere. But unique commercial buildings often have unique tenants. A museum, for example, should approach insuring its contents with the utmost attention to detail, because of the value and generally irreplaceable nature of the museum’s artifacts.
Antique and historic buildings don’t lend themselves well to standard, off-the-shelf property insurance policies. Don’t settle for a computer-generated policy based on construction material and square footage. That works okay for mass produced buildings, but not for antiques. An on-site inspection and appraisal by a qualified expert is a must.
It also takes experience in the industry. These buildings aren’t a great match for brand new agents. It takes years for insurance professionals to develop the experience and underwriting expertise to ‘see around corners’ and recommend adequate coverage.