Insurance Building Research Paper

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¶ … Building Insurance Coverage

Each year, natural disasters adversely affect building owners and lessees around the world to the tune of hundreds of billions of dollars. Many consumers and business owners are familiar with the main types of building insurance such as fire and flood property insurance, but there are a number of other different types of building insurance that are also commonly used depending on the circumstances. This study presents an examination of these different types of building insurance, followed by an analysis concerning what factors should be considered when selecting building insurance. A discussion concerning the various uses of building insurance and recent trends in the industry is followed by a summary of the research and important findings in the study's conclusion.

Table of Contents

Introduction

Review and Discussion

Background and Overview

Types of Building Insurance

Factors to be Considered

Discussion

Conclusion

Introduction

Although the types of protection that are used to insure buildings vary, they are all intended to protect the policyholders from unexpected disasters, a need that has become especially pronounced in recent years. Floods, fires, explosions and other incidents can disrupt businesses and human lives. Indeed, every year, natural disasters exact a significant toll on human lives and economic damage, with the third-most serious year on record taking place just recently in 2008. In this environment, identifying opportunities to prevent further losses in the future represents a timely and valuable enterprise, a goal that also forms the focus of this paper which provides a review of the relevant literature concerning building insurance, followed by a summary of the research and important findings in the conclusion.

Review and Discussion

Background and Overview

The findings of a recent study by Michel-Kerjan and Kousky (2010) highlight the importance of building insurance for homeowners and commercial enterprises alike. For instance, according to Michel-Kerjan and Kousky, "The economic costs of natural disasters have risen dramatically over the past several decades. In the 1950s, natural disasters caused $53.6 billion in damages worldwide and by the 1990s, damages had risen to $778.3 billion" (p. 369). In fact, during 2008, direct economic damages from natural disasters resulted in approximately $200 billion globally, representing the third most expensive year on record (Michel-Kerjan & Kousky, 2010).

These recent increases in the economic costs that are associated with natural disasters have also highlighted the importance of providing adequate building insurance for the public and private sector alike. In this regard, Michel-Kerjan and Kousky conclude that, "Insurance has typically played a key role in providing financial protection against catastrophes. And insured losses have been growing along with total damages: of the 25 most costly insured losses over the period 1970-2008, 14 occurred since 2001, 12 of which were in the United States" (2010, p. 369). Taken together, these recent trends indicate that building insurance is an essential element in modern business operations, and the major types of building insurance that are commonly used are described further below.

Types of Building Insurance

The term "building insurance" is an umbrella term that includes a number of different types of insurance of both general and specific nature. Although there is no legal definition for "building insurance" per se, Black's Law Dictionary defines the term "building is covered" to mean "a phrase in a binder or contract of temporary insurance meaning that the property shall be insured in the standard form of insurance from that instant for a reasonable time until either the policy or policies can be written out, or their issuance approved or disapproved or some other temporary impediment to the complete formal contract of insurance can be removed" (p. 195). Irrespective of the type of building that is involved, though, a number of different types of building insurance are usually included as part of a mortgage or lease agreement or for personal or corporate reasons that involve the need to protect interests during the occupancy of a building and these are set forth in Table 1 below.

Table 1

Types of Building Insurance

Insurance Type

Description

Property Insurance

This type of coverage pays for losses and damages to real or personal property; typical types include fire and flood. For example, a property insurance policy would cover fire damage to office space.

Boiler and Machinery Insurance

Also known as "equipment breakdown" or "mechanical breakdown coverage," this type of policy provides coverage for the accidental breakdown of boilers, machinery, and equipment. This type of coverage typically reimburses policyholders for property damage and business interruption losses. For example, this type of coverage would cover fire damage to computers.

Debris Removal Insurance

This type of policy covers the cost of removing debris following a fire, flood, windstorm, etc. For example, a fire burns a building to the ground; however, the remains of the old building have to be removed before repairs can begin.

Ordinance or Law Insurance

Ordinance or law insurance covers the costs associated with having to demolish and rebuild to code when your building has been partially destroyed (usually 50%). For example, a three-story building is 100 years old. A flood destroys the basement and first two stories. Because more than 50% of the building has to be rebuilt, a local ordinance requires that the building be completely demolished and rebuilt according to current building codes. Property insurance covers only the replacement value, not the upgrade.

Business Interruption Insurance

Business interruption insurance covers lost income and expenses resulting from property damage or loss. For example, if a fire forces a business to close its doors for 2 months, this insurance would reimburse the policyholder for salaries, taxes, rents, and net profits that would have been earned during the 2-month period.

Inland Marine Insurance

This type of coverage insures property in transit and other people's property on the covered premises. For example, this insurance would cover fire-damage to customers' clothing from a fire at a dry cleaning business.

Glass Insurance

This type of insurance covers broken store windows and plate glass windows.

Builder's risk insurance

This type of insurance covers buildings during construction. For example, a builder's risk policy would cover losses if a windstorm takes down a partially constructed condominium complex.

Source: Adapted from Springer, 2012

As can be seen from the different types of insurance that are available, a number of different combinations can be created that provide the levels of coverage needed for different types of buildings. Although the need for many of these different types of insurance may be apparent, other factors may be less easily discernible and these issues are discussed further below.

Factors to be Considered

One of the more interesting issues to emerge from the research concerning building insurance was the different ways it is used to mitigate against potential losses which can be enormous, but the costs of the premiums that are involved also represent a hefty amount of money as well, particularly since it is reasonable to suggest that most building insurance is never actually used but is rather obtained pursuant to contractual requirements or corporate or personal preferences. Identifying how much and what type of building insurance is needed then becomes the essential question that policyowners must answer (Bonato & Zweifel, 2002).

Other factors that may need to be taken into account is the manner in which building insurance is used to achieve financial gain at building owners' expense. For example, in some cases in the United States, insurance companies and banks have used building insurance as a leveraging tool to reduce occupancy levels to the point where investors simply abandon their properties rather than try to maintain them at exorbitant premium rates to make way for more lucrative commercial construction projects. In this regard, Hoffman (2003) emphasizes that, "As insurance policies become more difficult to obtain, landlords would have to pay extremely high rates for them or take on the great financial risks of owning without insurance. More likely, they would walk away from their properties" (p. 42).

In other cases, though, building insurance can be used to help facilitate business growth. For example, in his text, the American Grocery Store: The Business Evolution of an Architectural Space, Mayo cites the ability of chain stores in the United States to obtain reduced price on their building insurance if several such policies are "bundled" together. In recent years, chain stores have realized reduced building insurance costs by decentralizing their warehouse operations, meaning that they have fewer buildings of very large size with the correspondingly higher costs of building insurance that are involved (Mayo, 1999). According to Mayo (1999), "The ability of chain store owners to control overhead costs and be flexible enabled them to channel their energies toward seeking profit-saving management devices. They were able to save on building insurance by having an umbrella policy over all of their stores instead of a separate policy for each store. This allowed them to get better rates" (p. 79).

There is also the question of preexisting damages that are the result of gradual natural forces such as subsidence that may not be… [END OF PREVIEW]

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