When is Replacement Cost Coverage not really Replacement Cost Coverage for Your Hotel?
Replacement Cost Coverage seems to be one of the least understood terms in the insurance vocabulary. Like many terms used in an insurance policy today, the term doesn’t mean to the insurance buyer what it actually means in the insurance contract. I will attempt to give you a few caveats in the following paragraphs. However, even this only touches the surface.
For many hoteliers, if they’re told their policy provides Replacement Cost Coverage, they assume that the property will be replaced. In some instances, that is correct. However, you must understand the rest of the policy to know the limitations of the term Replacement Cost. The insurance contract itself spells out the details of replacement cost, its applicability, its definition, and its limitations. It usually takes about 5 pages to explain to you all the terms and conditions.
The hospitality industry has done a good job in educating most hoteliers to ask for replacement cost coverage for their properties. Where we at RCI Insurance Group find the most problems is in the older or distressed properties that are purchased. For instance, you purchase a hotel in Tulsa, Oklahoma for $2,000,000. To rebuild that hotel, would cost $6,000,000. You tell your insurance agent that you want $2,000,000 of coverage on a replacement cost basis. You think, as long as I have replacement cost I will get my hotel rebuilt. Not necessarily so. As stated earlier, the insurance contract has limitations.
The first limitation is in 99% of the policies, the most the policy will pay is the policy limit; in this case let’s say $2,000,000. So, if your hotel is totally destroyed the most the company would pay is $2,000,000, not the $6,000,000 replacement cost. Well, you say, my hotel is solid concrete and I will never suffer a total loss, so $2,000,000 will take care of any loss I may suffer.
Another limitation in most policies is co-insurance. I will not attempt to go into detail about co-insurance in this article, but here is a brief illustration. Let’s use the above property. For this example let’s say it would take $6,000,000 to totally rebuild your property. Let’s further say you have an 80% co-insurance clause. By the policy terms (whether you know it or not) you are agreeing to insure your building for at least $4,800,000. If you insure your building for the $2,000,000, even if an agent tells you your policy has replacement cost, in the event of a partial loss you will not receive a replacement cost settlement. The reason you won’t receive a replacement cost settlement is because you didn’t meet your co-insurance requirements. In the above scenario of a $2,000,000 partial loss, even with $2,000,000 of coverage, you would receive less than 50% of your actual loss.
Here is one other quick point about co-insurance and property coverage. Unlike health insurance, if the premium is the same, the lower the co-insurance number the better the odds are that you won’t suffer a co-insurance penalty. With property insurance, 80% is better than 100%, if the premiums are the same.
All of the above just points out the need to deal with an insurance professional who can assist you in getting the proper coverage that you understand. The lowest cost does not necessarily mean that you have the best coverage should you suffer a loss.
At RCI Insurance Group, as the exclusive agents for the National Hotel Insurance Program, we have a number of tools to help you make an informed decision about you hotel insurance.
Whether you are in Oklahoma, Kansas, Missouri, Arkansas, Texas or any other state, give us a call with any questions about your hotel insurance. You can also find additional information on our web-site at http://www.rci-ins.com/hotels-nhip.
Just remember, replacement cost coverage is not always replacement cost coverage. Protect your business today with Oklahoma, Kansas, Missouri, Arkansas, or Texas hotel insurance coverage from RCI!