Building Values

Welcome to Risky Business Commercial Insurance with Butler Buyers. This is Paul Martin, the host of this show, I’m also the business commentator in CKOM, and joining me, my regular expert on this topic, Colin Rooke, the commercial risk reduction specialist with Butler Buyers. Colin, since we last talked, lots of big headlines, but the one on the commercial front that at least has been getting a lot of attention, and it’s almost like it just feels like this giant wave that will never break, interest rates and inflation, and all of the costs that are going up around, everything from supply chain interruptions, which elevated prices to the cost of money to you name it. I’m guessing that insurance is no different than any other sector of the economy that inflation has a bite here or has some implications. And often, we find in business that there’s a symptom and there’s an ailment. And so sometimes those two things are different.

We look at the symptoms all the time, but there’s ailments too, and what’s happening here? Are there things, aspects of this inflation story that your insurance customers are missing out on or not really on top of that we need to perhaps elevate today in today’s show, and bring their attention to it?

Yeah, absolutely. We talked about the, in a previous show, inflation and how that’s going to impact the pricing around commercial insurance. We talked about the marketing or the market, sorry, is softening, or at least we’re seeing some normalization when it comes to rate. However, you still have clients saying, “Well, I don’t understand, why are my premiums still going up?” And we say, “Well, there’s the rate and then there’s the values. And so if we’re changing the value on the policy, but the rate assigning that value remains the same, you’re still going to pay more.” So we walk through that, but really I think it’s important to dive a little deeper and say, “Okay, well how do I know my values are right? What should I do? What’s going on in the industry and how that’s going to impact me?” And the biggest factor is insurance to value, and specifically when we’re talking about owned property and, then to a lesser degree, equipment and stock.

But it’s a term that’s brought up all the time in our industry among brokers and underwriters, and it’s a constant point of discussion. And it really means, insurance to value means that you are required to carry enough insurance to rebuild, call it, a building, with new like materials in today’s age, meaning you’ve got an old building, you’ve now got to bring that up to code, there’s different types of materials. And so certainly when you have, call it, out of control inflation and you’ve got input costs on the rise across many sectors, all sectors, really, it’s very important to make sure you’ve taken a look at the value of your building and you understand that we have the right number of value assigned, or in the event of a claim, you could be looking at a significant shortfall.

It’s an interesting thing because you talk about a double whammy, that business owners need to be on top of, which is rate increases, but also value increases. So it’s not one or the other, it can be both. And there’s no question we’ve seen the cost of construction go up, whether that’s for materials or now we’re increasingly seeing it in labor because of the labor shortages that are out there and prices are going up on that side too. How often should an insurance customer or a policyholder be getting ahold of you to say, “How often do I need to update these values?” Is it annual, Is it twice a year or is once every three years good enough? I mean, can you guide me on that a little bit?

Yeah, so it’s really important that every year you’re having some discussion on values and what’s taking place in the marketplace. In fact, roughly 70% of commercial properties in Canada today are underinsured by 40% or more, to give you an idea of the magnitude of this problem. And so it’s important that you’re having that discussion, but then it’s also important, it’s not just good enough to say, “Well, we should have this talk, Colin. What number should I go in at?” It’s really important to bring in the experts too and have proper building appraisals done if you haven’t. And we would say on, call it, during regular times every three to five years, but now that we’re in this position of rampant and inflation and increased construction costs, I would recommend, frankly, you might want to do it every year or so, or make sure you’re working with a property evaluator or an appraiser that will give you ongoing updates.

So you may not need to do the whole valuation, but at least you’re getting market updates year over year, that based on what we saw, you should add 8%, you should subtract 7%. Something from a professional that says this is the number that we should be using. And you go from there.

I’m guessing that this leads to a failure to be this proactive, to have this independent third-party analysis done probably leads to all kinds of arguments between those who hold insurance policies and the insurance companies in the event of a claim. Am I right on that? Or I’m just guessing at that, but I’m assuming that this has the potential for all kinds of arguments.

It is. And what we see all the time, you’ll speak to a client or a prospect or you’re doing the renewal and they say, “Oh yeah, we’ve done that. I’ve spoken to my commercial realtor.” And then they looked at neighbouring properties and the value they’re suggesting is $1 million. The problem with that, and it happens all the time, is that’s considered market value. That has nothing to do with replacement value, insurance to value. So what you could sell your building for in the open market is based on elements like lot size, building condition, location desirability, that sort of thing. The cost to rebuild that piece of property, regardless of market conditions, is irrelevant. And frankly, often there’s a very large spread. We also run into the same similar, I guess, rationale, let’s say, “Well, I pay property tax and my new property tax amount is based on the assessed value. And so that’s what I want to use, again, for the reconstruction cost.” But again, that has nothing to do with building codes, new like materials, debris removal, architects, engineering, all that would be required to rebuild that structure.

It’s just based on, frankly, an outdated models that municipalities use just to assess what they should be charging you in property tax. So again, if you’re relying on either of those numbers, you’re probably, again, going to run into a situation where there’s a claim and there’s a significant gap in coverage.

I hear you saying that, hey, we’re in an inflationary environment right now, and prices are going up quite a lot over a wide range, and not everything, the price of lettuce does not go up at the same pace as a price of a house. So I mean, you really do need to be conscious of this, and it’s just plain good business management to be on top of it and update your own balance sheet, and just take a look at what properties do I own and what’s a current valuation on them. It’s really just good prudent management, isn’t it?

Yeah, it is. And one more shortfall too that you’ll run into is insurance companies will add inflation, as we discuss, in most cases, at renewal to make sure that there’s some attempt to keep up with, again, rising costs. But those are set and often they’re set Canada wide, and so they’re not designed to ensure your building is properly insured, it’s just designed to do something. So usually, renewal inflationary increases are 3 to 5%, and that’s okay for the most part, but when you run into situations like we’re in today, and we have, again, the insurance company saying, “We’ll just add 3% every single year to the building equipment stock,” you’re going to realize that there could be a sizeable shortfall using that method.

Well, on a fascinating conversation, we’ve got to take a little break and I do want to pick this up when we get back because you raised some very interesting points here. You’re listening to Colin Rooke, the commercial risk reduction specialist with Butler Buyers. This is Risky Business back after this.

Welcome back to Risky Business Commercial Insurance with Butler Buyers. This is Paul Martin, and joining me, Colin Rooke, the commercial risk reduction specialist with Butler Buyers. Before the break, Colin, you raised a very interesting, excuse me, an important point, I think, which is not all markets are alike. Insurance companies tend to set prices for a national experience. But let’s face it, the price of buildings in Toronto is different than they are here. And prices here have been quite stable, prices in Toronto are starting to fall. So as a business owner and a property owner, you really do need to stay on top of your own individual circumstances. You simply can’t rely on the insurance company to come up with a blanket national figure, you’ll miss the mark.

Yeah, and you made a good point too, that when you work with a property appraiser, it’s not all bad news. It’s not just every single year, it’s up, up, up. So you could have market conditions increase where the value of your building has increased should you sell it, however, construction cost can and do often decrease where the update they’re providing would be you are significantly overinsured. And so it’s really important to wrap your head around, I want to make sure I’m buying what I need, nothing more, nothing less. And this isn’t just a gimmick to say, “Well, we want you to just keep adding to the value and paying more and more and more with no end in sight.” It very much and often does decrease. For example, if you looked at the cost of lumber from about 18 months ago to today, now, the cost of lumber still is over from three years ago, but it is half that from 18 months ago.

So in the event, again, you had regular building appraisals completed with updates, your building could see a decrease just based on the pricing of lumber alone. And so again, it is good business practice and it’s part of our risk assessment process where we talk about these things. Are you keeping proper appraisals? And then here’s the reason why, and here’s how it’s going to impact your business long term. And then from there, we categorize that into physical risk and we work on a plan to address those.

That’s an interesting point because one of the things that’s going around in the back of my head here is if Colin’s giving me advice that, while it makes sense and all my other suppliers are telling me similar things, “Inflation has changed the landscape,” and I got so many duties and responsibilities to keep up to I’m not sure I can, and still run my business at the same time. So I’m wondering, you alluded to this I think, but I’d like you to clarify, your risk reduction system, your step-by-step plan actually provides some support for me as a policyholder to A, get reminders, but B, just to stay on top of this thing.

Yeah, absolutely. Our risk reduction system is designed to cover business risk, which is anything that impacts day-to-day operations. We address strategic risk, so anything that would impact long-term viability, and we also talk about physical risk, anything that would cause a physical loss to the business. And proper building valuations is part of that physical loss, so it’s part of every risk reduction workshop we will walk our clients through to say, “Are you up to speed? Are you doing this? Are you uniquely aware of the value of your buildings? How often are you looking at it? And then here’s the potential physical risk to you should you choose to do nothing.” And that’s all part of our process of identifying risk, organizing risk in a different categories, quantifying risk. So that’s us saying, again, here’s the cost of doing nothing and then prioritizing risk where we say, “Okay, from going through this process, we feel as a group, not just us telling our clients, but we’ve agreed together there could be a significant shortfall on the value of your property. And so item one is going to address that quickly.”

Yeah, as I’m listening to you, I’m thinking this just makes so much sense because market conditions change and we need to be not on top of them only for, if I could call it outward looking stuff, business we’re trying to generate, but also to protect the assets that we already have inside our organization are already listed on our balance sheet. And I guess I’m going to come back to this what can Colin do or what can Butler Buyers do to help. And what are you encouraging your clients to do or prospects to say, “Dial us up, we’ll have a chat on this”? I’m guessing you just say, “We’d welcome the opportunity to have that conversation.”

Yeah, absolutely. It’s all part of our risk reduction workshop. If anyone has any questions on the process or specifically just wants to talk building valuations, they can reach out and we’ll walk them through and we’ll give our opinion on their current level of preparation and the potential value of their properties.

If, like everything else in this economy today which is being stretched, we simply don’t have enough human resources to go across the waterfront, you’re hearing about job vacancies, that kind of stuff, am I right in assuming that probably those who are charged with property appraisals are feeling the same kind of pressure? And so I actually need to get organized about this and make an appointment, I can’t just phone them and say, “Can you come over in 20 minutes?” I’m guessing that their dance card’s pretty full too. Is that your experience?

Yeah, I mean, that’s a good point. Like anything, it’s one of those ‘Get to it now’. Because if you’re listening to this show and saying, “You know what? I think I’m underinsured. And in fact I really haven’t thought about this and I got to get to it.” Like anything, you’re right, there’s going to be probably a longer runway. I mean, there’s some fantastic firms out there and they will, I think, prioritize based on urgency. But you’re right, anything, you should give it plenty of time.

Just wise advice here, just be on top of the files. And I guess if nothing else, this program today just reminds people of another thing they need to look at when they’re any business owner or chief financial officer or someone that’s responsible for the insurance purchases at their business, that, yeah, here’s one more thing to put on your list. And this program identifies a lot of those, but this is a new one and it’s a direct result of changing market conditions, and what we call inflation.

And if I can add one more thing, in the event of a loss, you’re required to rebuild the building, call it, with like material. So for those out there with an old historic or heritage building, you might think, “Well, the market would pay me a million dollars, but the reconstruction cost might be 15 due to the materials it was made from.” For example, imported limestone rock. So if you fall into that category, you own an old building or a building with unique features and you haven’t done this, you need to get on it.

Colin, as always, very insightful and timely advice and just great reminders for those of us who are in business. You’ve been listening to Colin Rooke, the commercial risk reduction specialist with Butler Buyers. This is Risky Business, I’m Paul Martin. Thanks for joining us, and we’ll talk to you next time.