What is Replacement Cost Value Insurance Coverage?
What is replacement cost value? Learn what replacement cost value is, how it may relate to your insurance policy, and how it compares to other insurance options.
The Covid-19 pandemic has had a significant impact on the workplace, with social-distancing requirements causing many offices to close and employees to begin telecommuting. Retailers and restaurants also were forced to temporarily shutter under state- and local-government mandates. Businesses are now scanning their commercial real estate insurance plans to reveal whether their policies cover income loss incurred due to this pandemic-related work stoppage.
Many companies, such as Twitter, have told employees remote work could be a long-term, or even permanent, option. If this shift occurs, businesses might have to rework their insurance policies. Remote work could add new risks.
Here are some types of CRE insurance that could be impacted by shifting to a remote workforce:
Cyber insurance. A company might need additional coverage within cyber insurance. Cybersecurity risks rise with more people working from disparate locations with various home networks. This could make computers more vulnerable to hacks, scams, and data privacy loss. Cyber insurance likely would need to also cover employees accessing a company network from their own devices, not just the network used in the main office.
Commercial crime insurance. This is related to cyber insurance and also might need to be adjusted. It covers a company for losses such as fraudulent impersonation. This is when an imposter convinces an employee to make fraudulent payments.
Liability insurance. Policies should be reviewed to ensure the coverage territory includes remote employees and independent contractors. It should include language such as the coverage territory includes anywhere their workers are located.
Property insurance. Companies typically would want property insurance to cover equipment, such as computers and other devices, and data. Policies often cover specified locations, so the policy’s language might need to be adjusted to cover property used by workers at remote locations.
Business interruption insurance can be part of a business owner’s policy. It typically covers income losses when a business must close due to physical damage sustained from an unforeseen event, such as a fire or natural disaster.
Business interruption insurance will not necessarily cover income losses resulting from government-ordered closures due to Covid-19. Most policies cover business interruptions due to physical damage. Some policies might even include an exclusion for viruses.
However, a business’s property insurance might include a civil-authority clause covering income loss when a government orders a business to shut down. Policies can vary, so it is important to read a policy’s language closely to see if it would apply to your income losses incurred due to the pandemic. Some civil-authority policies cover only losses due to property damage.
Whether potential viral contamination constitutes property damage is in question. Hundreds of businesses have already sued their insurance companies arguing that income loss due to government-mandated closures should be covered.
Prior to the pandemic, many businesses were adding collaborative space within their offices and company culture was a key factor in recruiting employees. A preference for collaboration and social interaction could bring some companies back to a central office.
If firms choose to reopen offices for employees, more square footage might be needed to accommodate social distancing requirements. This could push companies to vacate cities, seeking larger spaces available in the suburbs. At the same time, some companies may choose to allow more employees to telecommute, and those firms could seek smaller office footprints.
Another option would be to redesign already leased space, providing more square footage per employee but also fitting fewer employees in the office. In fact, 60 percent of real estate executives responding to a recent survey by real estate services firm CBRE indicated they were seeking lease renewals and more than half put relocation plans on hold.
Whether space shrinks or expands, changes will likely occur within office operations, such as adding technology for touchless elevators and doors or to indicate parking space availability. Schedules for entering and exiting the office also could be added. Updated air filtration systems may circulate cleaner air and monitor air quality, and enhanced office cleaning protocols will likely be in place.
As some companies begin to reopen, property owners should keep communication open with tenants. Landlords can work to ensure that operations and new health and safety protocols will satisfy tenant needs. Landlords also should review lease agreements with tenants to make expectations clear. A force majeure clause could be part of a lease. This gives tenants a way out for unforeseen events, and a specific reference to pandemics could be added.
A landlord also should look at property insurance to see if coverage includes a tenant having to close due to Covid-19 exposure.
Many businesses were forced to close during the Covid-19 pandemic, causing them to lose income and miss rent payments. Small business leases might have an abandonment provision allowing landlords to terminate a tenant’s lease if the tenant seems to have abandoned the property.
Signs of abandonment could include terminating utilities or removing furniture and equipment. Local rules for this process may vary. Commercial tenants and landlords should carefully check their lease agreements to examine rules pertaining to their rights and obligations.
It is unclear how many companies will switch to a fully remote workplace following the Covid-19 pandemic. However, Global Workplace Analytics estimates that 25 to 30 percent of the workforce will be working from home multiple days a week by the end of 2021.
Companies shifting to a long-term remote workforce should review their policies for insurance coverage gaps to make sure they align with their updated needs. Landlords also could begin planning office updates to accommodate health concerns and social distancing guidelines. At the same time, owners should work to strengthen tenant relationships and review lease terms and obligations to determine their and tenant’s rights.