Historic properties come with additional exposures, alongside the standard ones. This blog highlights three key exposures underwriters should consider, to help formulate a sound underwriting decision.
3 Main Factors for Property Underwriters to Consider
It may often seem like older buildings are a thing of the past. However, many individuals and organizations fight to preserve the historical aspects of structures. Retaining the ornate details and facades of older buildings is what gives them their charm, whether it be old mills converted into shopping plazas or historic banks being transformed into trendy restaurants. We consider historic properties as defined by the National Register of Historic Places. Typically, these establishments are 50 years or older; they resemble the original structure and have a cultural/historical significance. In 2018, there were more than 90,000 properties listed on the National Register of Historic Places. It is important to understand the different risks associated with historic properties. In this article, we will focus on three concerns property underwriters should consider before offering a quote.
Impact of Codes and Regulations
One of the first variables to consider when underwriting historic properties is the impact of both national and local codes, as well as regulations during property repair. The more historical significance a property has, the more effort is put towards keeping the building in its original condition. There are instances when updated codes may interfere with the integrity of the original structure, in which case the property generally gets a pass on having to comply. On the other hand, if the property does not have a lot of historical significance, it must comply with the updated codes and regulations.
Typically, older buildings left “as is” are okay without updated codes and regulations until the insured decides to undergo rehabilitation or repairs. The following are examples of codes that may impact the construction and/or cost:
- Adding sprinkler systems for fire safety compliance
- Making sure the structure is compliant with the American’s with Disabilities Act standards for accessible design
Often, insureds are caught off guard by these unplanned, increased costs of construction, so they may experience gaps in coverage. They may need “Ordinance of Law coverage” to cover the gap, but that may prove too difficult to secure or too expensive because of the property’shistoric structure.
Rebuilding as “Like Kind and Quality”
Another issue with historic properties is the increased cost associated with repairing the property to be “like kind and quality.” Any standard insurance policy includes language that states the insurer has an obligation to “repair, rebuild, or replace the property with other property of like kind and quality.” This proves difficult when considering older properties because many of the materials used during the time of construction are more expensive than today’s standard materials.
Another factor to consider is that it takes more time to make repairs to an historic building and they may require a more specialized contractor; all these factors amount to a higher repair cost. Typically, the more unique and ornate the structure, the costlier the repairs will be.
Another key factor to consider is the valuation of historic properties. The most common way of determining a building’s valuation is using the replacement cost tied to the square footage of the building or using the market value/purchase price.
There are many ways insurers can protect themselves when providing coverage for historic properties. One common approach is using the Functional Replacement Cost. The International Risk Management Institute defines functional replacement cost as “the cost of acquiring another item of property that will perform the same function with equal efficiency, even if it is not identical to the property being replaced.” This prevents the insurer from needing to use specialized material or contractors when repairing the building after a loss, ultimately lowering the cost of repairs. The property is repaired using modern materials that provide the same functionality as the older materials.
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Historic properties are not the “big bad wolf” of property insurance. However, they do create different factors that underwriters should consider before offering a quote. The three factors discussed here are the most important, but there are the others to consider as well. The key is to educate yourself on all the potential exposures to properly evaluate and price any given risk.