A question we often hear at Commercial Coverage Insurance Agency: “We recently made some substantial upgrades to our units after some long-term tenants moved out. Do we need to tell our insurance provider about these upgrades? Is it likely to affect our premiums?”
Upgrades to an apartment building come in many forms.
- Regular maintenance on an annual basis.
- Preparing an apartment unit for the next tenant.
- Repairing and replacing the building systems.
- Additions to the building, such as adding another floor, pool or even a garage.
The real consideration is whether the upgrades have increased the “replacement cost” of the building. Standard apartment upgrades to prepare for a new tenant such as new carpet, new paint, and upgrading appliances in the bathrooms and kitchen will require apartment grade materials. The repairing and replacing of building systems, electrical, plumbing, heating etc. will also be replaced with apartment grade products. Neither of these increase the replacement cost of the building. Therefore, if your building is “insured to value”, at the time of loss you should have the limits you need to replace and rebuild your property. As an example, if your 6 unit apartment building has a total loss and you are insured to value, you will be able to build and replace what you lost with like kind and quality.
Larger upgrades, like adding another floor or other structures, do increase the overall building’s “replacement value”. If you do not notify the carrier and increase your limits, you may not have enough coverage to replace or even repair any portion of building, old or new, due to co-insurance causes. (Requiring you to insure to value)
As a rule, your insurance is only as good as the coverage you have purchased. The most overlooked factor in placing coverage is “insuring to value” while the most scrutinized issue is price. Too many times policies are evaluated and adjusted based on price while little concern is given to limits and coverage. As an example, most property policies have a stated limit the carrier will pay in the event of a total loss. This limit is the most which will be paid, regardless of the current cost of construction, any upgrades you have made and even the additional cost to repair or replace the undamaged portion of the building as could be required by a building ordinance. If your policy limits are not “insuring to value” the “replacement cost” of the property, most may have a huge shortfall for any loss you may incur.
In summary, it is in your best interest to insure your apartment building to its replacement cost in today’s market. If your 60 year old building has a total loss, you must build a new building. The proper coverage will provide the capital needed to rebuild your building, with new building systems and appliances, even if you just replaced it prior to your loss.