Graham‘s Sprout Gourmet, LLC (GSG), a fine dining health food restaurant, is in trouble. The area economy has tanked with the closing of a nearby Solar Panel Manufacturing plant, resulting in the loss of 5,000 jobs. Many of the plant workers were also regular customers of GSG, and their departure from the area has resulted in a serious downturn in business, not only for GSG, but for many other area businesses.
Fortunately, the local government is quite resourceful and is actively seeking ways to lure new business into the area, and is confident that all the lost jobs will be replaced within a year. However, in the meantime, GSG will have to cut expenses to ride out the storm until the economy improves. Chris Graham, the owner of GSG contacted an independent insurance agent, Katie Haley, who was highly recommended by a business associate, to review his insurance program and recommend ways to save money. The restaurant is located in the headquarters of a now defunct bank. Chris spent a great deal of time and money remodeling the bank space to accommodate the restaurant. The bank, mindful of its image, spared no expense with a liberal use of marble, mahogany paneling and molding, and ornate craftsmanship throughout. The interior exudes a feeling of stability and strength to all who stand in its stately corridors.
“Why this building?” Katie asks, while admiring the beauty of the surroundings.
“It was cheap; I bought it for less than half price on the courthouse steps when the bank went under,” says Chris. “It cost $10 Million to build and I got it for a heck of a deal. While not ideal for my business, it works fine.”
“It says here the building is insured for $15 million,” says Katie, perusing GSG’s property insurance policy.
“That’s what it would cost to replace the building,” interrupts Chris. “My insurance agent advised me to insure the building for its full replacement cost, and if I didn’t I run the risk trying to collect on a claim – even a small one. Something about coinsurance penalties as I recall.”
“Chris, if this building were destroyed, would you rebuild it like it is today?”
“Heck no! Doubt I could if I wanted to. They don’t build them like this anymore; I don’t think anybody even knows how. For $5 Million I could build a very suitable replacement, and it would still be the nicest restaurant in the area. I would just pocket the remaining $10 Million.
“It doesn’t work that way, Chris,” explains Katie. The ‘principle of indemnity’ won’t allow you to profit like that on a property insurance claim. Trust me on this. Since you are looking for ways to save money, I have an idea that may help.”
“Talk to me.”
“In property insurance there is a coverage approach called ‘functional building valuation’, which exactly fits your situation. You won’t replace this beautiful, old building, because you probably can’t, and even if you could, it doesn’t fit your needs. The functional building coverage endorsement would allow you to replace the property with similar property that performs the same function, even better, but at less cost. It is designed for buildings that have become obsolete or with expensive features unnecessary to the current use of the building. If you can replace the building for $5 Million using less expensive materials and the insurance company agrees, and we comply with all governmental regulations, we can insure it for the $5 Million, and you will save a lot of insurance premium, money you desperately need now. How does that sound?”
“Let’s look into it, Katie,” says Chris.
Use of the Functional Building Valuation Endorsement, in the appropriate situation, accomplishes three things:
- It deletes the coinsurance clause with respect to the building or buildings to which it applies
- Provides coverage for replacement cost of partial losses or “market value” if not replaced; and
- Includes ordinance or law coverage without specific limits
We can help determine if this property endorsement is right for your business and situation, give our Commercial Insurance Team a call to discuss how this endorsement could save you money.
