Understanding property insurance

Camping Magazine, July-August, 1996 by Ed Schirick

Property insurance is often considered of secondary importance in a camp's insurance portfolio. Sometimes this situation is the result of limited resources, but more often it stems from a lack of understanding about need, insurance options, and the devastating impact a property loss can have on a camp.

Once you understand some common terms and the available options, it is possible to manage the risks of loss to your camp's real property (buildings) and personal property (sports equipment, beds, etc.) effectively, even if your resources are limited.

Property insurance is usually written on either an actual-cash-value or a replacement-cost basis.

Actual cash value

Actual-cash-value property insurance is also known as depreciated-value insurance. Actual cash value (ACV) is determined at the time of a property loss; it involves establishing, with the help of a contractor, the cost of replacing the building or personal property. After this figure is determined, a depreciation factor, based upon the age of the item, its useful or expected life, and its condition is applied. The result is the ACV.

When property insurance is structured this way, the camp assumes the risk for the difference in value between the ACV and the actual replacement cost. This situation is perfectly acceptable from a risk management perspective, if it is what the camp actually intends. However, if the money to pay the difference between the actual cash value and the replacement cost of the property is not put aside, a camp could be left without enough funds to rebuild. This circumstance, at best, could put a financial strain on the camp budget and, at worst, could put it out of business.

Replacement cost

Under a replacement-cost policy, the underwriter agrees to repair, rebuild, or replace the damaged property with other property of like kind and quality, subject to all other terms of the contract. Simply put, this means that old property is replaced with new property. Camp directors who purchase property insurance on a replacement-cost basis do not need to set aside money to offset depreciation.

Some directors may want to consider insuring only essential buildings (those that must be operational for camp to be open) on a replacement-cost basis and other buildings on an actual-cash-value basis. This blended approach maximizes insurance coverage in the areas critical to ongoing success. Camps should only use this approach if they have a strategy to pay for the shortfall between the ACV and replacement costs of buildings designated as nonessential.

Appraisals

Whether you choose ACV, replacement cost, or a combination of the two as your strategy, your camp needs an independent appraisal to establish these values. Sometimes insurance agents and insurance companies provide estimates of insurable values, but only an independent appraiser will be able to come solidly to your defense as an outside authority if there is ever any dispute over the values.

Additional coverage

Directors can also insure for additional costs they incur because of building laws. For example, some communities might require demolition of a partially damaged building if the cost to replace or rebuild is more than 50 percent of its value. Other laws might require electrical wiring to be upgraded or wheelchair accessible bathrooms be installed. Without purchasing coverage options for building codes, demolition, and increased costs of construction, the camp must bear the additional costs of these items.

Another area often overlooked by directors is loss-of-income and extra expense insurance. These business interruption coverages are key tools directors can use to stay open after a property loss. The most common loss-of-income insurance covers the loss of gross profits that result directly from a covered cause of loss.

Extra expense insurance is usually written in conjunction with loss-of-income coverage. Extra expense insurance pays costs above regular costs associated with keeping a camp operating after a covered loss. This coverage has helped many camp directors preserve their business and their relationships with campers and parents.

Take time to assess your property insurance program. Get an appraisal and adjust property values each year to keep pace with increases in construction costs. Your insurance agent can help you stay current with these adjustments. Get an updated appraisal from the appraisal company every three to five years, sooner if there are extensive renovations, new construction, or additions to existing facilities.

Most important, make 1996 the year your property insurance program and risk management strategy become priorities. Minimize your exposure to risk and financial loss by taking a proactive approach. You may never need to find out if your plan works; but if you do, and it does, you'll be glad you invested your time and resources in your camp's property insurance.

Ed Schirick is senior vice president of the Markel Insurance Company camp and youth recreation division. He is a charted property casualty underwriter and a certified insurance counselor. Send your risk management inquiries to: Ed Schirick, c/o Markel Insurance Company, 4600 Cox Road, Glen Allen, VA 23060.