Anatomy of a Property Claim

What happens when you have a property claim? If you are like most real estate investors when buying a policy to cover your investment, the focus is on limits and price; after all, insurance is insurance, right?
 
In an ideal world, insurance would be insurance. It would all cost very little and provide more than you could imagine when filing a property claim. You would never suffer any pain or bear any responsibility. But like any dream, the reality is usually grounded in work you have to do to ensure your experience does not turn into a nightmare.
 
The following is a "nuts and bolts" look into a property claim and what happens when you have damage that requires your insurance company to pay so you can get back into pre-loss condition.
 
For this example, we will not dive into any potential underinsured instances or penalties, rather just the mechanics, beginning to the end. We will refer to the  claim as a "fire," but keep in mind that the property claim process will be the same regardless of covered peril.

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Building

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Time

​One of the two measures you need to keep in mind about property claims is time. The other is money. From the first day to the last day, you are on the clock. The insurance company does not owe you any more money for a job that you or your contractor completes in less time. If you or your contractors can not justify any delays, you will suffer more loss than necessary.

Money

​To get paid what you are owed, you have to keep detailed records for every dollar spent on putting your property back together from day one. The carrier will likely not provide you any guidance and say that you can keep records however you wish. From experience, you can  save yourself a lot of pain by keeping detailed records and regularly providing these to your adjuster. Keep a ledger and EVERY RECEIPT! Doing so will allow the adjuster to recommend changes early in the process if needed.

​At the end of the property claim process, a reconciliation will be between your policy, the adjuster's estimate to repair your property, and your actual expenses. To get the full amount that the insurance company owes, you make sure your records are complete.

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Day One:

On day one of your property claim, for instance, your property is consumed in fire. The fire department spends hours putting out the  fire, cutting holes in your roof, hitting walls, cabinets, doors, etc., with an ax, and making sure everything is soaked in water to prevent any additional fire. Fortunately, no one was hurt.
 
The fire department ropes off the property to keep outsiders out of the property until their investigation to determine the cause of the fire is complete. The analysis takes three to four days. Then, each insurance company, yours, and your tenants investigate for evidence that points to the responsible party who will ultimately pay for the damage.
At a minimum, you can expect the property claim investigation phase to take seven to ten days.
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Secure the Property:
Now that the property is damaged and no one is occupying it, it is critical to control its entry. Failure to do so can prevent the fire marshall and insurance adjusters from determining the cause of the fire and can cause additional loss. Depending on the damage, securing the property can be tarps, plywood, door locks, a fence, a security guard, or a combination of these suggestions. Until the property investigation is complete, it must be kept secure.

Week Two

​Now that a cause is determined, the assigned adjuster will set about adjusting the property claim. First, the adjuster will match coverage to the cause of the damage, then will confirm limits are adequate to pay for the damage.
 
During this time, the adjuster will meet with you and a restoration contractor to determine the damage's cost.

Week three to four:

​The adjuster will present the repair estimate, a starting number used to adjust the property claim. It is not the ending point. The policy requires that the insurance company notify you within 30 days after receiving a sworn proof of loss of their intentions to pay for repair or replacement of your building.
 
The Valuation clause of your policy states that the initial settlement offer will be an Actual Cash Value offer. This number reflects the cost to repair the building minus depreciation. For round numbers, you can expect the amount to be half of the total replacement cost estimate.
 
If you purchased the Optional Coverage, Replacement Cost, you have 180 days to request your claim be settled on a replacement cost basis. The additional funds needed to make you whole will not be paid until the damaged property is repaired or replaced.

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Hiring a contractor

​The insurance company does not have any construction workers on staff to rebuild your building. So, it is up to you to interview and hire a competent contractor to do the work. If you elect to act as your general and hire out all of the subcontractors, make sure you have a firm

understanding of all the trades needed to get the job done. Repairing damage to a building is different from new construction, and not all contractors do insurance remediation work.

The work

Once you and the insurance company agree on the repair estimates, you will receive your initial cash value payment. You or your contractor will need to get plans, apply for permits and line up the material suppliers and contractors to do the work.
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The initial work will be demo work so the reconstruction can begin. As the demo work is complete, additional damage may likely become evident. So the damage can be accounted for, and you can collect for the extra damage more easily. It is best if you or your contractor notifies the insurance adjuster right away.
 
Once the demolition is complete, the renovation begins. Depending on the amount of damage, it will likely be a hive of activity; framing, windows, plumbing, electrical, drywall, texture, paint, flooring, cabinetry, finish carpentry, etc. In a tight market where labor is in short supply, there will be periods where nothing happens while waiting for the next needed trade to perform the next task. This process is normal.

Completion:

​Once all of the work is complete and the certificate of occupancy issued, you can now get back to business. To complete the property claim settlement with the insurance company, you must present your final accounting that details all the payments you made and receipts for the expenses. The insurance company will reconcile the amounts paid to date, estimate, change orders and bills you submit, less your deductible to determine how much the insurance company owes you.

Potential discrepancies:

​If your policy provides the Replacement Cost Options, you are owed new for old. If your damaged property was builder-grade finishes and you rebuilt with custom finishes, you will be responsible for the difference in cost. If your records are detailed, it will be easier for the insurance company to reconcile and make payments. If your documents are unorganized, you will likely get some pushback and work harder to get what you are owed.

Business Personal Property

The definition of building on a Commercial Property policy includes items used to service or maintain the building, including appliances used for refrigeration, cooking, dishwashing, or laundering. If you have an office on the property or a supply room where you keep supplies, for this and other properties, you will need to have it accounted for and covered under Business Personal Property.

The property claims settlement process follows the initial steps in the description above. Rather than engaging a contractor, you will have to itemize and provide proof of ownership for all items lost. The itemization can be in list form. Establish proof of ownership with receipts or photographs. For the replacement cost of each item lost, you will need to contact retailers for the price.
 
Most insurance companies work with buying services and may be able to replace the item for less. If this is the case, you need to make sure the item is the exact model you are owed and not a lesser quality item.
 
Once you produce the list, the insurance company will provide you with an Actual Cash Value initial payment like the steps above. Once you have replaced the item and give the receipt, they will provide the difference to make you whole.

Loss of Business Income

If your policy provides for Business Interruption or Loss of Rents, you will have an additional claim for lost income. Ideally, you have Actual Loss Sustained for 12 to 24 months. If you have a specific dollar amount limit and coverage with a fraction or coinsurance limitation, your attention to the clock is critical. You don't want to run out of money because your repair took longer than your policy limits provide.
 
Remember, Record keeping is crucial to get your property claim appropriately paid.
 
The carrier will request current leases to determine the amount owed. If a space is occupied, you should collect the rent you would have if damage did not occur for the rented space. If a space is vacant, there is no loss of business income owed. From the current leases, the carrier will pay after the loss has occurred. This process is the reverse of what you receive from your tenant, due on the first of the month.
 
Payments will likely be included with other amounts owed. The carrier should provide you with an itemized list of what they are paying for, but it can be difficult to keep accurate records given the initial discount applied for Actual Cash Value. When you have questions, get answers.
Please don't wait until you are eighteen months down the road trying to sort it all out.

Potential property claim issues

As mentioned at the beginning of this, the potential penalties, etc., have been left out. For details on the following, please click the link:

• Coinsurance Penalty
• Building Ordinance or Law
• Equipment Breakdown
• Vacancy