As self-storage business owners undertake budget preparations for the coming year, one of the expense items to be considered carefully is business insurance covering the facility operation. It is being forecast that 2017 market conditions will continue to produce a soft market in terms of insurance cost. For many self-storage business owners, this represents a flat or minimal change in insurance premiums. Basically, absent a catastrophic event, any increase to most will be as a result of increased construction costs, which will be reflected in a higher replacement cost of the property.
Of course, not every facility will experience this outcome. One of the most critical factors when it comes to underwriting a self-storage operation is location. As a result, properties situated in high-risk areas, such as coastal regions, and those areas prone to severe wind and hail activity, such as many regions in Texas, Oklahoma, Colorado, Arkansas, Kansas and other states, should be prepared to see potentially higher renewal premiums. Losses in regions within these areas continue to rise, and carriers respond with increased premiums.
Insurance Challenges for High-Risk Self-Storage Properties
Self-storage businesses with these types of high-risk underwriting characteristics also may see the application of percentage wind/hail deductibles. We routinely see percentage deductibles up to five percent for properties at extreme risk of wind and hail damage. In addition, the insurance carrier may apply a cosmetic loss limitation endorsement, which typically limits coverage to roofs if the damage is cosmetic in nature but provides coverage for structural damage to roofs.
Actual Cash Value vs. Replacement Cost Value
A large percentage of the self-storage industry nationwide is aging, which ultimately signals older buildings and increased risk to insurance carriers. Business owners with self-storage properties that fall into this category need to be aware that they may see the application of actual cash value (or ACV) to their properties rather than replacement cost value. The ACV may apply to the whole building or just the roof. In general terms, coverage for replacement cost value will compensate the property owner for the full cost of replacing the lost or damaged property. In contrast, actual cash value, also known as market value, is equal to the replacement cost minus depreciation due to age, wear and tear, and other factors.
An operation’s loss experience is another determining factor that underwriters take into consideration when pricing an insurance policy. If a property has experienced a high number of losses within the past three to five years, the business owner should be prepared to see this experience reflected in the renewal premium price.
Schedule an Insurance Policy Review
It is always wise to schedule a policy review with an independent insurance agent when examining a renewal quote or in comparing quotes from multiple carriers. An agent can help explain the policy terms to ensure that clients are comparing “apples to apples.” In particular, due diligence is required if a renewal policy has a lower premium than in previous years or if a carrier offers a premium significantly lower than other carriers. Take care to examine the policy to ensure that the coverages have not been reduced in order to achieve a lower premium. Without a full understanding of a policy’s coverages, the money a policyholder saves today may not provide compensation for uncovered exposures that could result in costly future losses.
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