Written by Black Commercial Inc. President, Jeff K. Johnson, SIOR, CCIM

Fire and casualty insurance for commercial real estate for some property owners is an out of sight out of mind expense. Many real estate investors I know focus on getting the best premium each year at renewal and spend little time reviewing the terms of their policy or the replacement values of their properties. When the topic of fire and casualty insurance comes up we commonly think “that will never happen to me”. An annual review of your commercial real estate fire and casualty insurance policy terms and corresponding property values is a very important part of effectively managing your investment real estate!

In 1989 I developed a 12,000 square foot medical office building for an ear, nose and throat medical practice and two dentists. The doctors and dentists leased space in the building and were also my partners in the LLC that owned the building.

The good quality, wood frame, cedar sided medical office building provided a great place for my partners to run their medical and dental practices and it also provided us as owners with a solid real estate investment for twenty-three years.

About three and a half years ago on a Friday afternoon in July one of my partners, whose dental practice was on the second floor of the building, thought he smelled smoke. Steve checked every suite in the building but could not determine where the smoke oder was coming from. He called the fire department and quickly had everyone vacate the building. Fortunately, on a Friday afternoon in July all of the other tenants had already left for the weekend, so it was easy for Steve, his staff and patients to quickly exit the building.

The fire department arrived and after a full inspection of the building the firemen noticed smoke beginning to seep out of an exterior wall where the electric service and air conditioning condenser unit piping entered the building. Within a couple minutes that end of the building erupted in flames. Due to the potential explosion of compressed gas tanks in the two dental offices the fire crew was forced to back off and “manage the fire” resulting in the building being a total loss.

Due to a good sense of smell and quick thinking by Steve no one was injured. Additionally, the dentists and the medical practice occupying the building were able to quickly find new space and get back in business.

After the fire our first step was to review our insurance coverage and determine how to move forward. Fortunately we have a very good insurance broker who had worked with us each year to annually review our policy coverage and building replacement valuations. Having good policy terms and updated valuations helped us quickly work out a settlement with our insurance company. That settlement provided us with the funds necessary to rebuild the building at current construction costs. One important provision in our policy provided up to $50,000 in the case of loss for costs related to changes in the building codes since the building was originally constructed. That provision provided for the cost of a fire sprinkler system when we rebuilt.

The fire provided an exit strategy for my partners who had by now retired and sold their medical and dental practices. With new partners, I bought out my former partners and we recently completed construction of a new building on the site for a physical therapist and a dermatology group.

This loss provides a great example of the reason it is important to regularly review and update your fire and casualty policies. It also highlights the importance of working with a professional insurance broker or agent who will find you a reputable insurance company, with the best terms, good pricing and help you keep your replacement valuations current!

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