What Level of Building Coverage Does a Landlord Really Need?

[Burt L.]

WhIen speaking to insurance agents they ask me how much building coverage do I need? I have no idea but I'm told that $200 per sq ft is replacement cost in the greater metro area. 

Does appraised value or loan value have any relavance? An agent today said that a lender will want at least as much coverage as the amount of the loan but that they don't insure loans, just the structure and so the amount of the loan isn't relevant. But lender underwriting could have a loud voice on this, too.  For tax allocations purposes its often accepted that 20% of the value is allocated to non-burnable land which would indicate that 80% of the value of the entire property should be the building coverage policy amount. 

In my current case, I 'm also told that since the lower two units of the property are considered below grade even though only one side "has dirt" against these walkout level units, that I only have to insure the units above grade and not the lowers as they are considered basement space. 

What do experienced people usually choose as the value to insure for building coverage? There doesn't seem to be much standardization in this area and the agents seem to be looking to me -perhaps to overinsure - I don't know. 

Hearing the different viewpoints starts to make the headspin....What is the more-accepted practice?

[Jason Bott]

@Burt L.

You need to first start with your lender.  If they are going to require a Replacement Cost Estimator, and require you to insure to that limit, that is your answer.

If they only require the loan limit covered, than it is up to you to figure out if you want to insure to the full limit of the building, or some % of it.  If you insure too far below the estimated Replacement Cost, you could be penalized for being underinsured at claim time.

I don't agree that your exposed lower level should be excluded from your valuation.  If there is a claim in those lower units, do you want the policy to extend coverage?  If so, then include them in your valuation.  If they are "storage" and have little value, then you can self insure for the value of that space.

Hope that helps you with the valuation.