Understanding risk management terms related to commercial real estate (CRE) hail damage helps you make informed decisions about your insurance coverage and associated risk management strategies.
RCV, or replacement cost value, is the total cost to replace or repair damaged property with materials of like kind and quality, regardless of the age or depreciation of the damaged property.
If a roof is damaged by hail, owners with RCV coverage will receive the full cost of replacing or repairing the roof with similar materials, even if the roof is near the end of its lifespan.
ACV is normally calculated as RCV minus depreciation. Depreciation accounts for the age and condition of the damaged property at the time of the loss. In the case of a hail-damaged roof, an owner with ACV coverage will receive a payout that factors in the roof's age and remaining useful life, resulting in a lower payment compared to RCV coverage.
During hail claims with RCV policies, most insurance companies release the ACV initially, ensure the restoration work is completed adequately, and then release the depreciated value minus any deductibles.
ACV vs. RCV: Which is better?
Actual Cash Value (ACV) policies pay out depreciated amounts, while Replacement Cost Value (RCV) policies cover the full cost of repairs with materials of like kind and quality.
For hail insurance coverage, there can be a significant difference between roof replacement cost vs. actual cash value. In the event of a loss, an owner with RCV coverage often receives a substantially higher payout than an owner with ACV coverage, especially if the damaged property is older.
CRE owners must consider the age of their buildings, hail exposure, cost of premiums, and overall risk management strategy when considering these options, but acquiring RCV policies on aging buildings can have significant upsides. At minimum, owners should be aware of which option(s) they are paying for.
Percentage-based deductibles are calculated as a percentage of the insured value.
For instance, if a commercial property is insured for $10 million and has a 2% hail deductible, the property owner has a $200,000 deductible.
Sometimes percentage-based deductibles incorporate clauses that add an additional cost based on a % of value lost from operational interruption. For example, if your business is losing $1mm a month and the restoration work will take 6 months following the interruption, and your deductible states that you have a 1% “time element”, you would owe an additional $60,000 (1% of $6M).
Generally, percentage-based deductibles offer lower premiums and additional flexibility, but they can be more expensive in the wake of a claim.
For example, it may make sense for a portfolio to accept a carrier’s offer to rope industrial buildings with new and sturdy roof systems into a high percentage-based deductible policy to drop premiums since the likelihood of loss is lower. If a catastrophic storm occurred, however, the deductible payouts may be more severe.
Deductible buy-down policies are separate insurance policies that reduce the deductible amount for an additional premium. This helps manage the risk of paying a large deductible in the event of a claim.
For example, if your current policy has a $400,000 deductible, a buy-down policy could lower that deductible to $50,000 for an additional premium.
This can be advantageous for companies that have low cash reserves and/or have luxury properties or expensive business equipment.
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Managing Deductible Risk
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An appraisal clause allows for an independent evaluation of a property’s damage when the insurer and the policyholder cannot agree on the amount of loss. Clauses are activated in hail damage disputes, with both parties selecting appraisers and an umpire for an unbiased assessment.
Appraisal clauses prevent time-consuming litigation, help settle claims efficiently, and ensure fair property damage valuations. For prompt settlement and repair commencement, it's essential to document damage, choose experienced appraisers, and maintain clear communication with both the appraisers and your insurance carrier.
Coinsurance clauses in commercial property insurance policies require policyholders to insure their property to a specified percentage of its total value, typically ranging from 70% to 100%. If a property owner fails to meet this requirement, any claim settlements will be reduced proportionally to the amount of under-insurance.
For example, a $1 million building with an 80% coinsurance clause must be insured for at least $800,000. Incomplete coverage can result in significant penalties when filing a claim.
CRE investors should be aware of ordinance or law allowances in their insurance policies. These allowances provide additional funds to bring a building system up to code when repairs or remodels are required, beyond the covered loss amount.
Municipalities often update their building codes based on standards set by the International Organization for Standardization (ISO), and while existing buildings are grandfathered in, any repairs or remodels affecting the coded systems typically must adhere to the new standards.
CRE owners and investors should be aware of "roof surfacing" exclusions in their insurance policies, which insurers include to limit coverage for non-functional damage.
Cosmetic or surfacing damage is usually defined as superficial damage from hail that alters the roof's appearance but does not affect its ability to function as a moisture barrier.
Limitations on coverage for roof surfacing can be hidden deep within a policy and may not be included with the rest of the hail claim documentation, causing many owners to miss their inclusion and forfeit opportunities to replace aging roofs for lighter hail damage.
| Tip: Owners who are cautious about insurance and do not have a surfacing exclusion should consider adding one to reduce premiums if they do not intend to use their insurance for lighter hail damage. |
Roof surfacing payment schedules adjust a policy’s coverage for a roof over time, based on factors such as the roofing material and age. These schedules are agreed upon between the insurer and the CRE owner or investor, and they determine how much the insurance company will pay out.
Similar to surfacing exclusions, owners should be aware of how diminished coverage from payment schedules affect exposure on a property-by-property basis.
Parametric insurance coverage is designed to expedite the release of funds based on data-backed thresholds for natural disasters.
Unlike traditional insurance claims that can take months to process and release funds, parametric coverage is based on predetermined thresholds. For instance, if an earthquake measures above 7.0 on the Richter scale or if hail larger than 3 inches is reported, funds are released to the policyholder.
Parametric coverage is useful to protect against paying for short-term repairs following a disaster. In the case of a severe hail storm that punctures holes in a roof, parametric hail insurance can provide the necessary funds to repair leaks while waiting on a regular commercial property insurance settlement.
Not understanding your commercial property insurance can break businesses in extreme scenarios. HailSolve has seen a number of commercial real estate owners smacked by the reality of their policy following a major storm event.
It can be the difference between receiving a roof system that will last decades and only being able to afford temporary patches, to complete operational interruption and surprise deductible amounts crippling cash reserves.
More mildly, it can be overpaying for coverage you never intend to use, paying additional premiums in an already expensive environment.
CRE owners use us to have one vendor for hail risk.
We work with business owners and portfolio managers to make smart hail risk management decisions that leverage insurance and building sciences expertise, creating scenarios that both avoid the worst outcomes but also surface valuable opportunities.
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