January 19, 2011

Credit Union Management magazine’s Web-only “Insurance Matters” runs the third Wednesday of each month.

You’d think that the coverage on your credit union’s buildings and business property would be pretty straightforward. It’s a place I see plenty of problems, though.

This and the next few installments of this column will focus on credit union property insurance, where I’ll pose the issues as questions you can put to your agent.

Do we have replacement cost coverage?

There are two ways most insurance policies value property:

1) Replacement cost is the cost to buy the lost item new. It’s the cost to rebuild the building with current cost of materials and the current cost of labor. It’s the cost to buy a new computer that is stolen.

2) Actual cash value is usually defined as replacement cost minus depreciation. It also can be thought of as the market value of an item. ACV is always less than replacement cost.

The replacement cost of a three-year-old computer may be $1,500, while the actual cash value may be only $100. Which do you want the insurance company to pay?

In most cases a credit union will need to replace property that was destroyed, stolen or damaged. Make sure your insurance goes along with that need.

Do we have blanket insurance?

Talk with your agent about blanket coverage—one amount of insurance for all your property. Even if your credit union has only one building, combining the building and contents into one amount of coverage (rather than having specific insurance for each part) can help you at the time of a claim.

Example – Specific insurance
Main building coverage: $1,700,000
Contents of main building: $750,000
Elm Street branch building coverage: $750,000
Contents of Elm Street branch: $400,000

If the Elm Street location burned, the policy would pay up to $750,000 for the repair of the building and $400,000 for the replacement of the contents. You could be under-insured on the contents and over-insured on your building.

Example – Blanket Insurance
Main building coverage: $1,700,000
Contents of main building: $750,000
Elm Street branch building coverage: $750,000
Contents of Elm Street branch: $400,000
Blanket amount of insurance: $3,600,000 (1,700,000+750,000+750,000+400,000)

If the Elm Street location burned, the policy would pay up to $3,600,000 for repair of the building and for replacement of the contents.

Are our limits of property coverage adequate?

Under-insurance is the No. 1 problem in property claims. If you intend to repair or replace your property in the event of fire, windstorms or other catastrophe, buy enough insurance to actually replace the property. Ask your agent to come up with an estimate of the replacement cost of your building, or ask a contractor to give you an estimated cost per square foot for a building like yours. If you built your building in the past 20 years, ask your agent about the “increased cost of construction factors” for your area.

Contents or personal property coverage is important too. Survey your belongings by walking into each room. Count $1,000 of value – don’t worry about the small stuff. For example, in an office – a desk and chair = $1,000. Three file cabinets, $2,000. Supply cabinet, $2,000. You’re trying to get a broad idea of how much insurance you’ll need to buy new property if you have a fire.

Are all locations and buildings listed, including ATMs and off-site storage facilities?

I find a surprising number of financial institutions with locations missing from their property insurance policies. Give your agent a list of every location and make sure they are all insured.

Are there co-insurance penalties in our policies? Can they be removed?

Co-insurance is a penalty provision that spreads the risk of a payout among more than one insurance provider. It never helps you. It can only hurt at the time of a loss. Ask your insurance agent if you have co-insurance in any of your property insurance policies. If the answer is yes, ask why. I have long said that having co-insurance penalties in an insurance policy is a good indication that your agent is not looking out for your best interests.

Have you considered higher property deductibles?

I find that many credit unions have relatively low deductibles. Think of it this way: Your home insurance probably has a $500 or $1,000 deductible and a few hundred thousand in insurance. Your credit union has millions of dollars of insurance. Does a $1,000 deductible really make sense?

Scott Simmonds, CPCU, ARM, CMC, is the unbiased insurance guy, consulting on, but never selling, insurance. His credit union Web site is www.CUinsuranceConsultant.com. E-mail Scott for a free copy of his white paper, “The Questions Credit Unions Should Ask Their Insurance Agent.”