145 University Avenue West, St. Paul, MN 55103-2044
Phone: (651) 281-1200 (800) 925-1122
Fax: (651) 281-1298 TDD (651) 281-1290
(Received 8-15-03 from Peter Tritz, ED of LMCIT. Format modified to reduce space.
Email message from Peter. “We'veessentially addressed the issue of historical reconstruction as a limits issue. In effect, we assume thatfor a historically significant building, "replacement" means reproducing the historical features. The issue then is to make sure the city has adequatelimits on that building to cover the additional costs that can be involved in historical reconstruction. On request from the member city, we'll have our appraisal contractor do a "reproduction cost" appraisal of the structure. The attached memo has some discussion of this issue. Pete Tritz”
b.Another county pool is seeking information about specific provisions pools make in property coverage of historic buildings and valuable papers, such as valuation methods, determining replacement cost, etc). This information will be used for an article that will then be made available to those who respond.
If you can assist with either request, please send your information to me
LMCIT PROPERTY COVERAGE LIMITS
LMCIT now provides both property coverage and the machinery breakdown coverage on a “scheduled limits” basis, unlike the “blanket limits” approach used in the past. Because of this change, it is now more important that the city review the estimated replacement cost figures for each building to make sure the available coverage limit is adequate.
This memo discusses how the “scheduled limits” approach works; some potential problems cities and agents will need to watch out for, such as historically significant buildings or vacant buildings; and other limits that apply to particular risks or properties.
When did the change to the “scheduled limits” approach take effect?
All LMCIT property coverage is written on a “scheduled limit” basis beginning with the city’s first LMCIT coverage renewal after November 15, 2002.
What coverage limit is available for each building?
For each building, the limit is 150% of the estimated replacement cost shown on the coverage schedule for that building. The estimated replacement cost is the value figure that was used to establish the city’s premiums.
For example, if the estimated replacement cost of a building and its contents is $2,000,000, the city’s premium for that building will be based on that value. If that building is destroyed, the most LMCIT would pay to repair or replace the building and its contents is $3,000,000 – i.e., 150% of $2,000,000.
What costs and damages does that 150% limit apply to?
The limit applies to the cost to repair or replace the building and contents, including “builders risk” property while under construction. The 150% limit also applies to property in the open.
There are several additional types of covered loss which are in addition to and outside of the 150% limit. These include loss of revenue, extra expense, and expediting expense; debris removal; leasehold interest; accounts receivable; valuable papers; utility services; asbestos and pollutant clean-up; rental reimbursement; and arson reward. The “errors and omissions” and “extraordinary expense” coverages are also outside the 150% limit. The respective limits which apply to these additional types of covered loss are summarized at the end of this memo.
Where do those estimated replacement cost figures on the schedule come from?
In most cases, the estimated replacement cost figures were established by the professional appraisals LMCIT has been conducting over the past four years, updated as necessary to reflect increased construction costs since the time of the appraisal. Appraisals have now been completed for virtually all LMCIT members’ buildings.
For recently constructed buildings, the estimated replacement cost may instead be based on the actual construction cost.
Where can we find the property schedules and appraisal information?
LMCIT will send a copy of the city’s property schedule, showing the most current estimated replacement cost figures for each building, along with the renewal application.
The city received a copy of the appraisal report on its buildings when the appraisal was completed. If you can’t find it or need another copy, contact your LMCIT underwriter.
What happens if the actual cost to repair or replace the property turns out to be more than the estimated replacement cost on the schedule?
As long as the actual cost is not more than 150% of the estimated replacement cost shown on the schedule, the claim is paid in full. If the actual cost to replace the property is more than 150% of the estimated replacement cost shown on the schedule, the excess would not be covered by LMCIT. The city would need to either find a way to scale back the cost of the repair or replacement, or eat the additional cost itself.
When might the 150% limitation not provide enough coverage for the city?
For most city buildings it shouldn’t be a problem. The appraisal figures for the estimated replacement cost should be reasonably accurate for most buildings, and the 150% provision allows a substantial margin for error. But there are some situations where it could be a problem:
- Historically significant buildings. The estimated replacement cost figures reflect the cost to repair or rebuild the “typical” building, based on the size, use, type of construction, etc. In a historically significant building, repair or replacement may become much more expensive, because of the need to reproduce specific historical construction techniques used in the building, such as ornate stonework, decorative plaster, etc. In some cases, these considerations can increase the cost to repair or rebuild a structure by as much as five or ten times.
- Unique architectural features. A building that incorporates unusual or unique architectural features – e.g., special woodwork, murals or other artwork, etc. – can pose similar issues.
- Building code compliance. If an older building that doesn’t meet current building codes suffers significant damage, the building code may require that the building be brought up to current code standards. In some cases, that can substantially increase the cost.
Are these the only types of buildings we need to worry about?
These types of buildings are most likely to be a problem under the new system, but they’re not necessarily the only place where a problem could arise. It’s a good idea to at least eyeball the estimated replacement costs for all of the city’s buildings to make sure they seem reasonable, that there aren’t any typos, etc. Remember: 150% of the estimated replacement cost figure shown on the schedule for that building is the absolute most that LMCIT would pay to repair or replace that building.
What should we do if we have one of these buildings?
Give your underwriter a call right away. As an interim measure, we can temporarily use a reasonable “best guess” estimate as the amount shown on the schedule. We’ll then schedule an appraisal to develop an estimated replacement cost figure that will reflect the property’s unique characteristics.
How will it affect our premiums if we increase the estimated replacement cost for a particular building?
If you decide mid-term to increase the scheduled estimated replacement cost for a building, it won’t have any immediate effect on your premiums. In other words, there won’t be any charge for the endorsement increasing the estimated replacement cost.
However, that new, higher estimated replacement cost will be used in calculating the city’s premiums at the next renewal. Your LMCIT underwriter can on request provide an estimate of how the increased values will affect the city’s future premiums.
Since we have the 150% provision, can we save some premium by scheduling the building for an amount less than the estimated replacement cost?
No. Premiums will always be based on the actual estimated replacement cost of the building. The 150% provision is intended only to provide a buffer or margin for error in those estimates.
A primary consideration for LMCIT is to make sure we treat all members equitably. That means that we need to make sure we’re figuring every member’s premiums the same way – based on the best estimate we have of what it would cost to replace that building. Allowing one member to arbitrarily select a lower valuation figure would mean that that member wouldn’t be paying their fair share relative to the actual risk they’re contributing to the pool.
How does coverage work for newly constructed buildings?
Generally the same as it does now. If the city constructs a new building during the year, that new building is automatically covered. Until the new building is scheduled, the applicable coverage limit for the newly-constructed building will be 150% of the construction cost or $5,000,000, whichever is less.
What if we acquire an existing building?
A newly-acquired building is also automatically covered, subject to a limit of 150% of the purchase price, or $5,000,000, whichever is less. However, we’d suggest that as soon as possible the city should provide an estimated replacement cost figure to their LMCIT underwriter, since in some cases the cost to rebuild a building may be substantially more than the acquisition cost. LMCIT will then schedule a formal appraisal of that building as quickly as possible.
Does this mean that there is no longer a blanket limit?
No, not quite. The city’s total amount of coverage is still subject to the same blanket limit just as it has been in the past. The difference is that that entire limit will no longer be available for a loss at a single building.
The blanket limit is equal to the total scheduled values of its covered property. That is, it’s the sum of the estimated replacement costs shown on the schedule for buildings and contents (including property under construction), property in the open, and mobile property, plus the market value of any vacant buildings.
An example might help clarify how the schedule, the blanket limit, and the 150% provision fit together. Suppose the city’s covered property consists of three buildings, each with an estimated replacement cost of $100,000. The blanket limit is therefor $300,000. If one building burns down, LMCIT will pay a maximum of $150,000 (150% of $100,000) to repair or replace it. If all three burn down, LMCIT will pay a maximum of $300,000.
How are vacant buildings handled?
After a building has been vacant for 60 consecutive days, it is no longer covered for replacement cost. Instead, it will be covered only for the building’s actual fair market value. In other words, if the vacant building is damaged or destroyed, the most LMCIT would pay to repair or replace it is the fair market value of the building.
Note: The limit for a vacant building is the fair market value – not 150% of the fair market value.
When is a building considered “vacant”?
A city-owned building is considered vacant if for a period of 60 consecutive days less than 31% of the building’s total square footage is either being used by the city for customary operations or leased out.
If the city is covering a building that the city rents but doesn’t own, that building is considered vacant if for a period of 60 consecutive days it doesn’t contain enough contents to conduct customary operations.
A building under construction or renovation is not considered to be vacant.
What should the city do if we have a vacant building?
We suggest that you notify your LMCIT underwriter right away when a covered building becomes vacant, and provide the information on the building’s market value at the same time. Keep in mind though that after 60 days the coverage on a vacant building is automatically limited to the building’s market value, whether or not you’ve notified LMCIT that the building is vacant. Similarly, if a vacant building becomes occupied during the year, you should also notify your LMCIT underwriter.
If a mid-term change in a building’s status – i.e., a building becomes vacant, or a vacant building is re-occupied – results in a premium decrease, the city will receive a mid-term credit. If it results in an increase, the increase is waived until renewal.
At the city’s next renewal, the renewal premiums for the vacant building will be based on the building’s market value, rather than on the estimated replacement cost. A higher rate per $100 value is used for vacant buildings, reflecting the higher risk due to vandalism, etc.
Do these changes affect our LMCIT machinery breakdown coverage?
Yes. The 150% limitation and the vacant building provisions also apply to the LMCIT machinery breakdown coverage.
Are there any other limits that the city needs to be aware of?
Yes. The LMCIT property coverage includes sub-limits or additional limits on certain types of properties, damages, or exposures. These limits are summarized below. These standard sub-limits or additional limits should be sufficient for most cities, but in most cases they can be increased by endorsement if necessary. (Because of reinsurance restrictions, some of these limits cannot be increased.) The city should review whether any of these sub-limits or additional limits need to be increased in order to meet its particular needs.
The following are sub-limits that apply to specific exposures. These are limits on the amount that LMCIT will pay for particular types of damage, within the overall blanket limit.
Coverage
/ LimitComputer equipment data and media / $1,000,000 per occurrence
Fine arts / $500,000 per occurrence
Covered property in transit / $250,000 per occurrence
Unscheduled locations / $500,000 per occurrence
Personal Effects / $25,000 per occurrence / $2,500 per employee
Water and flood damage / $500,000 annual aggregate
Golf course property / $100,000 per occurrence
Business personal effects / $25,000 per occurrence / $5,000 per employee
Terrorism losses / $1,000,000 annual aggregate
For most losses, the following limits are in addition to the overall blanket limit. However, if the particular loss falls under the “water and supplemental flood coverage”, coverage for these damages is within the $500,000 limit that applies to that coverage.
Coverage /Limit
Newly acquired covered property / Lesser of $5,000,000 per location, or 150% of the purchase priceNewly acquired mobile equipment / $250,000 per unit
Buildings under construction / $2,000,000 per location
Asbestos clean up / $250,000 per location
Loss of revenue/extra expense/expediting expense / $5,000,000 per occurrence
Loss of revenue, etc. – electric utilities / $500,000 per occurrence
Debris removal/ physical damage to covered property / $1,000,000 per occurrence
Debris removal/ no physical damage to covered property / $50,000 per occurrence
Leasehold interest / $500,000 per location
Pollutant clean-up and removal / $10,000 per location
Errors / Lesser of 90% of the loss or $500,000
Rental reimbursement / $25,000 annual aggregate
Arson reward / $5,000 per occurrence
Accounts receivable / $500,000 per location
Valuable papers and records / $500,000 per location
Utility service interruption / $100,000 per occurrence
Why did LMCIT make the change to this “scheduled limit” approach? It’s one more thing that the city now has to think about, that we didn’t used to have to worry much about.
Mostly it’s because of reinsurance restrictions. In the current very tight reinsurance market, our reinsurers were no longer willing to support a “blanket limits” approach. This is very much the trend in the commercial insurance world. Very few private insurance companies still provide true blanket limits coverage.
There’s also an issue of fairness among members. Under the blanket limits system, a city might have, say, a historical building, where the cost to reproduce the building would be much greater than the estimated replacement cost shown on the schedule. That city would be paying in less than other cities, relative to the actual amount of risk it’s contributing to the pool; that is, that city is effectively getting the benefit of a higher limit but not really paying for it. The “scheduled limits” approach helps correct that kind of inequity among members. But the main reason for making the change was because of reinsurance restrictions.
Who should we call if we have questions?
Call your LMCIT underwriter, or talk with LMCIT Administrator Pete Tritz or Associate Administrator Ann Gergen.
1