by Danny Saunders - Setnor Byer Insurance & Risk
17. April 2006 15:30
Most property insurance policies guarantee the replacement of your property in the event of a loss. These policies, which cover such things as concrete costs, flooring, ceilings, and plumbing systems are often silent when it comes to those costs you cannot visibly see. Costs such as consultant's fees, communications costs, and moving or relocation costs, are referred to as soft costs, and more often than not, they go uncovered.
Soft costs can best be defined as those indirect expenditures that are incurred in the repair and rebuilding of a property. They are those costs that while just as necessary, do not include the "bricks and mortar" needed to complete the job. Soft costs most often must be the result of a "loss" to Covered Property from any of the Covered Causes of Loss which delays the project's completion beyond the planned completion date.
While some insurance policies make a quick reference to soft costs, most do not include soft costs under the scope of "property insured," and thus do not cover them. If policies do not directly reference the reimbursement of soft costs, many property owners can expect to foot the bill when it comes time to rebuild. This is a scary thought given that soft costs can account for as much as 30% of the costs incurred in rebuilding a home.
What insureds will find if they closely examine their insurance policies is that their "Statement of Values," which outlines the replacement cost value of their property, does not include soft costs. This statement is the very basis for loss settlements that occur after a disaster. Therefore, if soft costs are not even considered as a replacement cost, how can insureds expect them to be covered?
Business owners should also consider soft costs when calculating their Business Interruption Insurance. Much like Direct Damage Insurance, it is unlikely that Business Interruption Insurance will cover such things as additional consulting fees, financial costs, permits, and interim housing, unless they are specifically addressed in the policy.
Many business owners mistakenly believe that because their Business Interruption Insurance policy includes a "Period of Indemnity" clause, that most soft costs will be covered. While they will be compensated for loss of profit following a disastrous loss, the period of indemnity only lasts so long, and many companies will find those soft costs accumulating after that time is up.
Insureds need to be aware of the reconstruction costs that are considered soft costs, and remember that they may or may not be covered. They should also speak with their insurance provider and determine which soft costs are covered under their particular policy. Some examples of soft costs are:
- Architectural and Engineering fees
- License and permit fees
- Legal fees
- Accounting and administration fees
- Appraisal fees
- Advertising and promotional expenses
- Increased mortgage costs
- Construction equipment rental fees
- Cost of vacancy
- Cost of labor
- Insurance
- Loan commitment fees
- Realty Taxes
To guard against having to pay astronomical expenses in the reconstruction of their home after a loss, insureds should take certain steps before accepting a property insurance policy. First, they should check that the soft costs are specifically addressed in the policy. Next, they need to make certain that the definition of soft costs suits their needs. Lastly, they must make sure to include their estimated soft costs in their "Statement of Values" for both Direct Damage and Business Interruption.
What you need to know insureds, as you settle into what has been deemed an active hurricane era, is that it is not enough to simply have property insurance anymore. Just as vital as being insured is a comprehensive understanding of what your policy covers. Insureds, you can no longer assume that your policy will automatically cover such things as soft costs; you need to ask if they do. Otherwise the burden of rebuilding your home after a loss may fall on you.
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