Remember inflation? Big increases in the real cost of construction and commercial property repair over the past year are making underinsurance a growing problem for business owners. It is more of a problem during times of inflation because the value of the items insured rises over the course of the policy term. Generally that’s what insurers will pay, even if the value has gone up and in end the insurance payment won’t cover the loss.
The cost of building commercial and industrial buildings in the US has increased 11 percent in the past 12 months, according to industry sources.
The cause in these unprecedented increases is the prices of steel, concrete, petroleum products and shipping. People automatically think fuel when they read petroleum, but what they forget is that there is a multitude of products that are made from oil. Adding more pressure to the cost of construction materials is China consuming more and more commodities, allowing increased demand for commodities, to work on the marketplace inflation.
So if you are a property insurance buyer and used a year-old statement of values for their August 1st renewals, you could be underinsured by as much as 11 to 18 percent.

Inflation is only one level of the underinsurance problem. In this hard market, property insurance underwriters have been strict in penalizing insurance owners whose insurable values are understated. A most common penalty is to restrict payment on a claim to the amount reported on the statement of values. Another way they penalize insurance buyers is by a coinsurance clause that is included in most policies. When a claim exceeds the insurable values, loss payments are calculated by the following formula: the amount on the company’s statement of values is divided by the actual value at the time of the loss. The ratio is then applied to the loss amount, and the insurer pays the resulting amount. The balance of the loss is the responsibility of the coinsurer: i.e., the insurance buyer.
What can be done about it? We recommend several strategies.
§ First, exercise extra caution in the preparation of your statement of
values. (current appraisal)
§ Consider getting updated appraisals, with your largest facility and then working your Way through the list.
§ Consider getting business interruption values prepared and certified by a CPA, from an accredited Appraiser who specializes in appraisals for business interruption claims for insurance buyers. (Business interruption values are one of the components of a list of insured values; the other is physical property values.)
§ Make sure your loss prevention appraisals are accurate and up to date.
§ Remember the first rule of underwriting: if there is a gap between the information your Underwriter needs and what you provide, the underwriter will fill the gap with pictures of dead presidents – and you will be expected to provide those pictures.
With real construction costs rising, it is more crucial than ever to have an accurate –  property insurance values. The underwriters look at the amount of information you supply them with, as how well informed you are, to establish your cost of insurance.

We can provide all of these services to you with the utmost of experience and professionalism.
Contact us for your business solutions. Whether it be forensic appraisals, or as simple as equipment or personal property, or as complicated as a business valuation with FASB 143 appraisal. We know what we are doing where as other think they do but cost you more.
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Once again the insurance companies win by not insuring for the real construction cost. This can happen anywhere in America and will continue to happen until people understand what the real construction cost of their property is.

Six months after wildfires burned 300,000 acres and destroyed 1,350 homes in San Diego County, victims face new difficulties with real construction cost in rebuilding.

As burned-out homeowners hire architects and contractors, some are finding that their insurance settlements aren’t going to cover all the real construction costs of rebuilding.

Teresa Manley, with the San Diego Firestorm Community Recovery Team. “It’s a full-time job to rebuild. It’s not like people go to bed saying, ‘I’m going to build a house tomorrow.’ Most people won’t be able to rebuild in a year and a half.”

George Kehrer an attorney and retired contractor working with Community Assisting Recovery, a group for homeowners. He said insurance payouts are far short of the construction cost needed to rebuild in most cases. The real construction cost discrepancies range from $60,000 up to $1.4 million, he said.

“Less than 10 percent of the people are happy, and the rest are just finding out that they are underinsured,” Kehrer said. “After six months, they’re in denial that someone has concealed the facts that they’re underinsured on the real construction cost.”

Kehrer has been speaking with people. He said of the 400 cases he’s seen to date, four had payouts within $3,000 of the real construction cost and 20 people had coverage that was close when combined with other insurance payouts. The rest, or 95 percent, he said, are underinsured.

“People are coming out of the woodwork and realizing that there is a problem,” Kehrer said.

Kehrer did the same in the 2003 fires, when he handled 1,020 cases. He said in that disaster the underinsurance averaged $206,000 based on the 120 cases that were disclosed.

This time, Kehrer’s data indicates that the gap between the settlement and real construction cost of rebuilding is more than $300,000.

Kehrer said the minimum construction cost is about $190 per square foot and can go as high as $450 per square foot.

“That’s just to get the house,” he said. “That doesn’t include the interior and furniture.”

“A lot of people are convinced that there’s nothing more that they can do,” Kehrer said. “They build smaller or buy a replacement elsewhere.

The insurance companies don’t care how much you are covered for. They just want the premiums every month. They also want you to give up and go away. They don’t care that you don’t know what the real construction cost is when you sign a new insurance policy. All of those people and the people in the past disasters know what real is, and they will defiantly be asking the right questions before they sign again.

So call or email us here at Official Asset Appraisers, let us help you with the real construction cost before there is a disaster.

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The real construction cost activity since 2001 has brought with it the strongest rise in real construction costs since the late 1980s. In real terms, to the general rate of inflation in the economy, this period has actually been higher than the cost increases of the 1980s.

It is not surprising that real construction costs are at a very high level at a time when construction activity in Australia and other parts of the world is also running at record highs and still rising.

We expect real construction costs all over the world to surge once again over the next 12 months, as construction cost continues to climb to new record highs. Total construction costs increased by 4.2 per cent over the year to June 2007. Macro monitor is forecasting the rate of increase to accelerate to over 6 per cent in 2008. Non-residential construction costs are expected to increase by more than 7 per cent in 2008.

Looking at individual cost categories; labor costs are going to be the strongest contributors of cost increases over the next two years. Previously, materials prices were increasing more, driven in particular by increasing world metals prices. Steel, aluminum and copper are all important to construction and all experienced big price increases on world markets over the 2004 to 2007 period.

Over the past four years to June 2007, real construction costs increased by 6.5 per cent per year. In the year to June 2008, materials costs are forecast to increase by 4.4 per cent. Wages costs increased by 4.7 per cent on average over the four years to June 2007, but are now expected to increase by 7.5 per cent in the year to June 2008. Falling productivity, the increase in labor costs will be close to 12 per cent, on our forecasts.

Looking longer term, the cost in the construction sector is expected to ease considerably once the level of activity stabilizes. Our forecasts this will happen during the 2009/10 to 2011/12 period. Once the demand for labor and all of the other inputs start to fall, the relentless upward pressure on costs will be alleviated. Overall forecast to be declining in real terms by 2010/11.

What does all this mean to you the business owner that owns his own building? It should stand out to you of a prime example of the fluxuation of construction cost over even a short period of time. You need to have your building appraised on a regular basis so that you are not either paying to much or not enough insurance for your building on replacement, rebuilding or the real construction cost of your building. Official Asset appraisers can help you value your assets, contact us now.

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All Appraisals performed by Official asset Appraisers are thoroughly Researched, Documented, and Reported for the purpose of value under the type of value concept for the client.  This process, from start to finish, remains the Responsibility of each Appraiser, which is in line with our own internal policy of maintaining Individualized Education, Current Market Economic Awareness, and Professional Skills.It is Official asset Appraisers goal to stay ahead of providing our clients with the absolute best in service.  Therefore, we are continually in pursuant to our clients changing needs and requirements; as such, the following aspects have been incorporated into our inventory appraisal format.

·  An expanded Exit Strategy that provides more analysis of liquidation options, which is based on a comparative foundation to actual liquidations.

·  A thorough listing of Lender Requirements to the subject, which includes details of provided reports, reports required, and any reporting restrictions.·  Full disclosure of any Off-site, Consigned, or other Extraordinary Inventories for which more precise.

·  A discussion of Potential Negative Factors that may loose value over time if not properly monitored.


In addition to the above, the following represents a list of the various types and formats of appraisal reports available according to the Uniform Standards of Professional Appraisal Practice.

Report Types:

Complete Appraisal:  An estimate of value performed without invoking the Departure Provisions of USPAP - Represents an assignment whereby the appraiser estimates the value of the subject without any atypical assumptions or conditions and “certifies” without reservations.A Appraisal in Summary Format is representing an unbiased third-party opinion of value, which can be fully supported by data and documentation in the project file.

Limited Appraisal:
Limited appraisals do not withstand scrutiny sometimes under examination.  The definition implies “something less than a complete appraisal” and, has not been documented thoroughly.

Report Formats:

Summary Format:  This format covers all aspects relative to a Complete Scope Appraisal. The presentation of information is more concise. Most appraisals are provided in this format.Restricted Format:  This format is a minimum presentation of information.  Its use is restricted to the client or clients agents and only for the purpose for which it is requested.
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The real construction cost that the insurance companies don’t disclose… when you find out it may be too LATE!

Most business owners, don’t understand the difference between Market value, new construction and replacement cost. There is a difference between new construction and reconstruction. What can you do to make sure your business or commercial building is adequately covered in the event of a loss? Find out what the real construction cost is before disaster strikes.

Should fire, flood or any natural disaster strike your business or commercial building your real construction cost should be defined by a qualified accredited appraiser that is a construction expert as well as a 2008-2009 USPAP compliant appraiser.

• Market Value for your building is defined as “the value that a willing buyer and a willing seller will exchange the property for in an open non-distressed sale”. This does not apply to the real construction cost that it will take to replace your destroyed business building.
• New Construction cost will cover just the building, no demolition or landscape cost.
• Replacement Cost is vague in definition and had a maximum that the insurance would pay as of the date of the contract. No consideration was given to the real construction cost. Replacement Cost will fall short of your needed rebuilding funds.
• If your building has been damaged or destroyed by disaster you will need a demolition team to remove and dispose of the debris before new construction can start. This cost usually is not included in your “replacement cost” insurance.
  Before you start construction you are in a negative balance to rebuild your business building according to your present insurance policy.
• WHAT IF THERE IS NOT ENOUGH MONEY TO REBUILD? Can I just take the insurance money? Yes you may take the Cash Value of your building replacement insurance… but, there is usually a hidden clause to only pay you half the insured amount!
• Real construction cost have been refined since 9-11. This national disaster eventually raised all insurance rates because of the magnitude of loss and the lack of real construction cost factored into the insurance policies. Real construction cost is the only answer to restoring your business and the building.

Contact Paul Fussell Valuation for a real construction cost appraisal.

• Accredited Senior Professional Appraiser - N.A.P.A.
• 2008-2009 USPAP Compliant
• Graduate of Architectural Drafting and Design
• 29 years Licensed Commercial Contractor
• Phone 480 326 3907

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