Do you sell additional limits of debris removal? Pretty much all property policies – personal and commercial lines – include debris removal expenses as part of the loss recovery. However, there are often sublimits of coverage, especially on total losses, the result being that the amount of coverage available for debris removal is inadequate. Again, this is very often true in the case of total losses and almost always true when the loss is part of a bigger, catastrophic loss incident.
A case in point is the recent Paradise, California wildfire that essentially wiped out an entire town (and has, to date, resulted in at least one insurance company bankruptcy). According to one account, this fire destroyed over 17,000 structures, resulting in 6-8 MILLION TONS of debris that must be removed. There is a very high probability that many, if not most, of these properties will have inadequate limits for debris removal.
The good news is that most policies provide options for purchasing additional amounts of debris removal coverage. The bad news is that these options are likely not often offered by agents and rarely purchased by customers. No doubt, this is a tough sale and determining reasonable limits is very difficult. But the article referenced above might be useful in your sales activity to illustrate the need.
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From a risk management consultant:
I use the following formula developed by myself and a fellow architect friend:
• For every 6000 sq. ft. of solid brick construction, it takes $70,000 to haul it away.
• For every 6000 sq. ft. of steel construction, it takes $60,000 to haul it away.
• For every 6000 sq. ft. of frame construction, it takes $50,000 to haul it away.
These costs are about 60% dump fees and 40% labor/trucking.
If you have a good architect, you can send him a photo. Just ask what he thinks it would cost to haul the entire building away. It doesn’t take long to exceed the limits of most standard policies.
From the same consultant:
In my property talks I like to talk about 4 deductibles. The first is the expected deductible, i.e., $500 to $5,000 for most folks.
The 2nd “deductible” is the difference between 80% or 90% policy limit and their out of pocket exposure following a total loss, i.e., 20% or 10% of RC.
For single structure accounts, there is the 3rd “deductible”. This is the cost of Debris Removal in addition to the amount of the loss. Debris Removal, in unobstructed sites, runs 12% to 15% of the cost to build new. If the site is dense urban, or obstructed, .Debris Removal can run 40%.
Then I talk about credit risk. When a lender had damaged collateral they must post substantially increased loss reserves on the loan – which usually makes the loan unprofitable. As mortgagee, the claim check is written in the name of the Named Insured and the firm holding the mortgage. The lender takes the insurance proceeds to pay off the loan. The insured is directed to a loan officer down the hall. Their business is closed, their property is destroyed, and the lender took all or part of the insurance money.
The City of Whatever has showed up with an order to clear the site within a specified number of days.
Take a $1,000,000 building with a $500,000 mortgage and insure it for 90%.
Standard deductible $ 1,000.00
10% on value $ 90,000.00
12% Debris Removal $120,000.00
Your insured is often doomed by insuring to 80% or 90% and not buying Increased Debris Removal.
A striking element from in my Katrina work was the critical importance of 100% RC valuation and Increased Debris Removal. Very few people can absorb the average 22% hit that insurance to 90% of value and total loss Debris Removal runs.
My first source came from a demolition company. Please remember, the average cost is 12% to 15% of RC value. RC value is often different from insurance limits.
Engineering companies have been a good source. Some of my clients own high rise office buildings in downtown sites. If there are contiguous walls the cost can easily be 40% of RC.
In many cities, there is no competitive bidding for demolition work. The local Mafia own the show and set the price.
Standard policies provide 25% in addition to the amount of property damage. This works fine – until the loss is total. The policy limit supplement for a total loss is $10,000, $25,000 or $50,000 in addition to the Building and Personal Property limit. This is where people with a single structure or specific policy are ruined.
I was in Charlotte, NC several years ago and the General Contractor’s chief was in the room as we were talking about the Builder’s Risk. The BR limit was $41,000,000. The policy offered a $50,000 sum in addition to the limit for Debris Removal in the event of a total loss. I asked the CG chief what he would charge to demolish the structure if we had a total loss when the building was 95% complete. He thought for a moment, looked around the site, said $6,000,000. The developer nearly choked. Then I asked about Soft Cost. That was $5,000,000 more. After an hour, the developer added $11,000,000 more coverage to the account.
Very meaningful and helpful information. Thanks Bill.