The Big I Virginia Winter 2022-23

• Building 3: $100,000
The blanket limit is $550,000. Applying traditional blanket
limits, this total is available for any covered loss to any one
of these three buildings.
If Building 1 suffered a total loss and the actual replacement
cost was $300,000, the entire loss would be covered by the
blanket limit.
However, if a margin clause is attached that applies the
120% option, the maximum available to any one building is:
• Building 1: $240,000
• Building 2: $300,000
• Building 3: $120,000
(Obviously, if all three are destroyed in the same event, the
maximum paid is the policy limit.)
Because of the margin clause, if Building 1 suffered a total
loss requiring $300,000 to replace, the maximum the policy
would pay is $240,000. The insured would be out of pocket
$60,000 due to the margin clause.
If the carrier requires attachment of a margin clause,
the highest allowable percentage should be used.
Interestingly, use of a margin clause does lower the
premium attributable to blanket coverage.
INFLATION GUARD OPTION
Unexpected events can increase the cost of reconstruction
during the policy period. Higher than expected building
costs, a natural disaster, a disruption in the construction
material supply chain, an increase in labor costs, etc. are all
possible. Such events increase the cost of reconstruction.
Within the CPP is the option to apply a hedge against
these unexpected increases known as Inflation Guard.
This coverage
option increases
the amount of
coverage on a
daily, pro-rata basis
throughout the policy
term.
For example, assume a building
valued at $100,000 has the 6%
inflation guard option added to the
policy. Six months into the policy term the insured has
$103,000 available if needed (1/2 of 6%). The amount of
coverage increases a small amount each day.
Applying the inflation guard option is one more step
in hitting or getting as close to possible to a structure’s
reconstruction cost. The available inflation guard
percentages begin at 2%. According to ISO rules, the
percentage is in 2% increments and can be as high as the
carrier will allow (thus the maximum percentage varies
Reconstruction Cost
Ordinance or Law
Blanket Limits
Inflation Guard
100% Insurance to Value
Replacement Cost
from carrier to carrier). Each 2% increment adds about 1%
to the property premium.
BUILDING TO
RECONSTRUCTION COST
Developing and building to reconstruction cost requires
the use of many different options and endorsements
available within the commercial property program. Given
the information provided in this report, following is a chart
demonstrating how these parts build to reconstruction cost.
COVID AND
RECONSTRUCTION COST
COVID has created conditions no one (well, maybe a
few) ever anticipated. The cost of building materials
has skyrocketed during the shutdowns and subsequent
movements towards reopening. Supply chains have been
disrupted, delaying delivery of materials; individuals and
businesses have undertaken renovations and additions
due to time (and boredom), causing increased demand.
Contractors are booked solid, causing labor and timing
issues.
Because of COVID and the resulting issues, insurance
professionals must address the realities of reconstruction
costs with their clients. Even if an inflation guard
endorsement is attached, the percentage is likely too low
in wake of the current situation.
​Mid-term limit adjustments may be necessary. At the very
least, notify insureds via a letter or other communication
of the current construction cost reality and document the
notification in the client’s file.
30 THE BIG I VIRGINIA WINTER 2022-23