Protect & Defend columnist Ed Branam, DVM, is the veterinary and animal services program manager at Safehold Special Risk Inc. A 1977 graduate of the Michigan State University College of Veterinary Medicine, Dr. Branam has worked in the insurance industry for the past 20 years. He is a former Sacramento, California, veterinarian and a former veterinary affairs manager with Hill’s Pet Nutrition.Read Articles Written by Ed Branam
News on the economic front is not good. According to the U.S. Labor Department, inflation is at a 40-year high. Meanwhile, the Consumer Price Index rose 7% in 2021 and maintained the pace in 2022. Unfortunately, no substantial near-term relief appears in sight. Consumers are painfully aware of the ever-increasing cost of managing their expenses, be it purchasing and operating a car, buying groceries or eating at a restaurant. But what does this mean for the delivery of veterinary services? Business costs have risen dramatically, forcing most practices to hike prices.
The critical physical components of veterinary hospitals, meaning property, equipment, inventory and other contents, have gotten costlier, too. Supply chain disruptions, coupled with the soaring prices of construction materials and labor, have dramatically inflated the cost of rebuilding and repairing properties and replacing vital equipment and supplies.
You’re likely insufficiently protected if you haven’t adjusted your insured property value limits recently.
Veterinary facilities typically are insured on a replacement cost or agreed (guaranteed) value versus the actual cash value. Replacement cost is what it would take to replace or repair property with that of a similar kind and quality. Agreed value is what your insurance company will pay when the insured item is damaged or lost. It differs from replacement cost and actual cash value in that you are guaranteed 100% of the amount listed on your insurance policy. Agreed value does not consider the replacement cost, age or condition of the damaged or destroyed property, only the stated value at the start of the policy.
In addition, agreed value waives any coinsurance penalty if your property is not adequately insured to the value. Some replacement cost and actual cash value policies include a coinsurance clause that might go into effect during inflationary times if you fail to increase your policy limits adequately. A coinsurance clause ensures that policyholders insure their property to the current value and that the insurer receives the appropriate premium for the risk. Coinsurance is usually expressed as a percentage. If the policy limit you selected does not meet the specified insured percentage, your claim payment will be reduced in proportion to the deficiency.
Good and Bad News
Remember that the current market value of a property is not the same as its replacement cost or agreed value. Market value is the estimated amount a property would sell for at the time of valuation. During high inflation, the market value can be significantly lower than the cost of the labor, materials and ancillary administrative, regulatory and legal expenses associated with a replacement.
The good news is that even when a policyholder is underinsured after a covered loss, a business property policy will respond and replace the damaged or destroyed property up to the policy limits. The bad news is the underinsured policyholder will exhaust the policy limits, with or without a coinsurance clause, before everything damaged during a catastrophic event, such as a fire, hurricane or earthquake, is replaced.
Also, be aware that in most jurisdictions, if the cost to repair the damage exceeds 50% of the building’s market value, the entire structure, including nondamaged portions, must be brought up to current building codes. That requirement includes electrical, plumbing, sprinkler and roofing systems. Authorities sometimes will condemn an entire building and require it to be razed and rebuilt from the ground up under current codes and construction material requirements.
A commercial property policy includes two basic categories of coverage for direct physical loss to property owned or leased. They are real property and business personal property. In addition, tenant improvements and betterments and ancillary contractual requirements must be considered.
Here’s a breakdown:
- Real property: Refers to the physical buildings and structures owned by and associated with the business. It typically includes permanently installed fixtures, machinery, and equipment such as cabinets, floors, heating, ventilation and air conditioning systems, built-in reception desks and filing cabinets.
- Business personal property: Often referred to as contents coverage, meaning business property that doesn’t qualify as building property. Business personal property is generally anything not permanently attached to the building and that you would take during a move. It can be owned, leased or in the business’s care, custody or control. Examples include medical equipment and supplies, pharmacy inventory, textbooks and furniture.
- Tenant improvements and betterments: Permanent additions or changes to a building by a lessee at their expense that may not be removed when the lease terminates. The replacement cost of these alternations should be considered in the practice’s business personal property insurance limits when renting or leasing real property.
- Ancillary contractual building requirements: Additional lessee responsibilities related to the general maintenance and repair and replacement of certain pre-existing building components, such as HVAC units and water heaters, not purchased or installed by the tenant.
Here are a few steps you can take to ensure your veterinary practice is adequately protected:
- Confirm that your real and business personal property is insured on a replacement cost or agreed value basis. If it’s replacement cost, confirm that the coinsurance clause has been waived.
- Confirm that your property policy provides adequate coverage limits, given inflationary conditions. Most insurance agents use a real property value estimation tool to calculate projected replacement costs. However, I’ve found that veterinary hospitals are often undervalued using that method. Sometimes, an insurer is reluctant to raise building limits above the evaluation tool’s estimate. In those cases, validate your request using a formal appraisal or a contractor’s replacement cost estimate.
- Confirm that the tenant improvements and betterments are adequately insured if you lease the building.
- Review your lease to see if you are adequately insured for any ancillary contractual building requirements.
- Confirm that your policy sufficiently covers additional “ordinance and law” upgrade requirements should your building be more than 50% damaged.
- Engage your insurance agent to review policy coverages, limits and options.
TWO FINAL POINTS
Confirm with your insurance agent that any appurtenant structures not listed on the policy, such as sheds, gazebos and storage containers, are covered as real or business personal property and insured accordingly. Also, note that business personal property is frequently underinsured. For example, practices often buy digital radiography, ultrasound, surgical lasers and diagnostic equipment but neglect to add the replacement value to the insurance policy. Likewise, the value of pharmacy inventory is frequently underestimated. Conduct a thorough annual inventory of your business personal property.