In the spring of 2012, a fire broke out in a 15-unit rental apartment (the insurance company’s estimated value was approximately $2 million) located near Korea Town, in Los Angeles. Among the 15 units, three were completely destroyed and another three were heavily damaged. The apartment was insured with an over sea insurance company through an independent insurance broker.
1) Structures, including building: $1 million structural coverage under the policy
2) Estimated rent and other expenses for one year: $67,000, rental income coverage under the policy.
After the fire, the landlord (whom I’ll refer to as Mr. A) commissioned a large PA company to handle the compensation process, thinking it would facilitate the claim adjustment process with the insurance company. After that, the insurance company processing the claim hired an independent adjuster. The independent adjuster immediately checked the replacement-cost value of the damaged building and determined the compensation by applying Mr. A’s co-insurance penalty. Then indicated the final compensation payment as follows, which was much less than the actual loss amount calculated by Mr. A:
- Compensation calculated by insurance company
1) Structure: $310,000
2) Other expenses, including rent: $24,000 (for six months)
- Loss amount calculated by landlord
1) Structure: $605,000
2) Rents and other expenses: $48,000 (for six months)
Such a compensation result put Mr. A in deep trouble. It wouldn’t be possible for him to restore the damage with such claim settlement. If this building is considered collateral for loans by the financial institution (bank), Mr. A would be in a more difficult situation. As a result, Mr. A checked with the PA company that handled his claim adjustment and told their company was unable to get any more compensation. Then Mr. A found this PA (Jae Park). Mr. A wanted to find out whether any additional compensation was possible. However, after reviewing the case carefully this PA concluded that there was nothing I could do to help the client. In other words, it was too late to do anything.
If this PA was commissioned to this loss within one or two weeks after the fire, the PA might have been able to reduce Mr. B’s worry by increasing the final compensation amount from the insurance company. However, in this case Mr. A had to accept the compensation from the insurance company even though it wasn’t enough. This PA will conclude the story as follows:
1) Mr. A might think that because the damaged building was insured for about $1 million, after the fire the replacement-cost value of about $600,000, which was much less than what he had insured it for, could be easily compensated by the insurance company. However, it was only Mr. A’s calculation; the insurance company used a different method. The replacement-cost value of the damaged building calculated by the insurance company was $2 million, so, by its calculation, Mr. A was insured for only 50% of the building.
Reduction of claim settlement was result of co-insurance clause/penalty. Therefore, the insurance company would pay only for the remaining 50%. Readers, please pay special attention to this part. There are related clauses in the insurance policy when you buy commercial damage insurance.
If you insure against a possible disaster, you must insure sufficiently to allow restoration after the disaster occurs.
2) There was a question about why the large PA company that landlord had commissioned simply monitored the compensation decision process of the insurance company. I wonder whether they had done their best for the client.
Until now, our readers have read somewhat adapted case reports. To protect the privacy of clients who have suffered disasters, portions of the contents described in this column are slightly different from the actual events.
I hope the client overcomes this difficult situation so that his business can flourish again.