By Randy Tipton
In the wake of the recession, self-storage owners nationwide are concerned about the market value of their properties. While some havent see a significant drop in value and others are already seeing improvement, there certainly is a trend in lower values when facilities are appraised.
Because of this, many facility owners feel their property limits in respect to the replacement values on their insurance policy should be reduced. This creates a dilemma as to how self-storage owners should provide accurate replacement-cost values to their insurance company while market values are declining.
Logically, it doesnt make sense that the cost to rebuild has increased this year given the state of the economy, especially with the reduction in construction costs and decline in land values. What many owners dont consider, however, are the fixed costs of supplies that are not decreasing. In fact, steel and cement prices have increased.
Many insurance companies have their own internal appraisal systems, whereas others rely on brokers and clients to use a reputable appraisal service and then check the increases against what theyre seeing in the market. Most insurance companies review properties annually and adjust their building values accordingly. Plus, most will insist self-storage owners carry full replacement-cost valuation on their insurance policies.
Get Coverage
Its important to know your insurance underwriter is looking at the cost to rebuild your buildings as they stand today; it does not pay consideration to the market value. Youll also be required to insure to full replacement cost for all buildings at your site. Self-storage owners often will declare, Theres no way my entire facility will suffer a loss. I dont want to insure the whole property!
While this may seem like a way to save some money, its shortsighted. Insurance should be purchased for small claims and catastrophic losses. The worst time to find out youre underinsured is when your entire facility has been devastated by a tornado and you dont have enough coverage to rebuild. The small savings in premium you experience will be paltry compared to the expense youd incur replace all or part of your facility.
Discuss valuation techniques with your insurance agent. This should be part of a regular review of your insurance portfolio. Rebuilding is typically the most cost-effective way to recover from a loss. However, some self-storage owners might choose not to rebuild. If this is the case, actual cash value might be the better way to address the valuation. This is normally defined as replacement cost minus depreciation. This needs to be considered when purchasing your insurance, not at the time of loss; when an insurance company subtracts depreciation, there can be a huge reduction in value.
Ask for an Appraisal
If you drastically disagree with the replacement-cost value used, one option is to request a replacement-cost appraisal from an appraiser licensed in your state, one familiar with developing such estimates. Theres a fee associated with this, and certainly some time involved in gathering the documentation and showing the appraiser around your property. In the end, you might spend more on the appraisal fee than the reduction in premium is worth. Also, make sure your insurance carrier will accept the appraisal before you move forward.
The cost of insurance is a critical element in your expense budget. Work with an agent who can guide you through the process and place your insurance with a carrier that specializes in self-storage.
Randy Tipton is the owner of Universal Insurance Facilities Ltd., which has provided specialized insurance coverage to the self-storage industry for more than 12 years. Universal has clients in 49 states, with a commitment to providing A-plus service; fast, fair claims handling at an affordable premium; and agents trained specifically in self-storage. For more information, call 800.844.2101; e-mail [email protected]; visit www.universalinsuranceltd.com .
