Transcription
Hi, I'm Jerry Sparks, president of AG Financial Insurance Solutions, and once again we have Rich Hammer, a renowned attorney for church law and church tax. We're just so glad to have you here, Rich, once again to talk about risk management. And today we're going to talk specifically about insurance coverage and limits.
Jerry, this is such a really a complex and massive topic. We were talking before the show; we could spend months, if not years. So for the next 50 months, we're going to be talking about insurance coverage. And not just it bespeaks the complexity of the topic and the fact that so many church leaders that are responsible for purchasing insurance for the church just don't know what to do. You're confused by it, and so what happens by default in many churches is the church will buy insurance because somebody in the church is an insurance agent and with Acme insurance company, and well, let's just buy insurance from Joe. Uh, and that's not the way to do it, is it, Jerry?
No, actually, it isn't. And actually, you know, it's amazing. Um, a lot of people just buy insurance coverage because they have a church loan, so the loan company requires it. So, oh, we've got to have that property insured. And so you want, you know, let's let's kind of split this out and let's talk about church property and the type of properties insurance we have because I don't think we're going to get to the liability section. So we'll we'll plan on this time; let's just talk about the church property coverage and how much to insure and the limits and that sort of thing. Okay.
And Jerry, maybe we could start by uh addressing a question that I get all the time, and that is, uh, Rich, how much insurance do we need? Let's limit it to not to liability; we'll cover that in the future, but for today, how much property insurance does a church need? You know, one of the things that I would actually tell your insurance agent to do is to run a Marshall & Swift appraisal on your building, so you make sure that you have a proper limit of insurance. A lot of a lot of policies have a co-insurance clause, which means that we're going to ensure our building for replacement cost up to a certain percentage. So most companies have, let's say, an 80 co-insurance clause. So if we have a million-dollar building, we need to ensure that million-dollar building for 80 percent of that million, or eight hundred thousand dollars. And if you do that and you have a fire that destroys the whole building, how much insurance they'll pay up to the total amount of insurance that you have. Now, likewise, let's say you only insure that for a half million dollars. So we had a million dollars worth of coverage as the replacement cost; we only insured it for a half million dollars; they're going to pay 50 over 8, or 5/8 of that claim um for coverage, and you're gonna have to pick up the additional cost. And that's where we get the word coinsurance; you become a co-insurer with your insurance company to pay the laws right. And most of the most the time you don't have a problem until you have a large loss, and that's not the that's not the time to find out if you have uh proper limit of insurance.
And so what should a church do to respond to that problem? Well, what they should do is actually visit with their insurance agent, and they need to look at doing a Marshall & Swift appraisal for they're insured, or you know, explain what that is. Uh, Marshall & Swift is an appraisal uh software that all in most insurance companies have. You could use B&C, which is another one, but your insurance agent should be able to to calculate what the replacement cost is of that building. If the if you can't get it from your insurance company, maybe you had an appraisal done on your building when you refinanced it or when you bought the building, and the agent could look at that appraisal because it will normally give you replacement costs. If it's recent, if it's recent market value is so much different than replacement costs, and that's where so many people get confused. We want to ensure for replacement costs because you want to be able to replace that building, not just have a little bit of coverage where you don't have enough coverage at the end to replace it.
Okay. Well, let's let's talk about some of the issues that arise when we're talking about property insurance for the church. And and Jerry, one of them would be uh for unique items. A lot of churches have very unique items that sometimes are of great value; for example, stained-glass windows, uh artwork, sound equipment, and uh maybe organs or handbells, instruments. Uh, and a lot of times churches don't realize that those unique assets uh are not insured under your under your general property insurance policy; there have to be special endorsements to cover those. You want to address that?
Yeah, what what you should do is actually if you have something special like a high-dollar organ or high-dollar stained glass, or if you have sound equipment that may leave the premises or even a mower that would leave the premises to go mow a vacant lot you have someplace else, you need to have an inland marine policy. And what what I would do is actually get an appraisal on if you have some high-dollar items; you need to get an appraisal, and that way it justifies what you're insuring the value for. A lot of companies, as you said, will limit the amount that they'll pay out for an organ or for stained glass, so you want to make sure that you have that. Likewise, if you have a lot of our youth groups will take the lighting equipment or sound equipment or musical instruments, you know, to another church to perform or to a school to perform or take lawn mowers that they may have to go, you know, some widows, you know, yard; they need to have coverage once those leave the premises. A normal property policy contents policy, okay, will not cover away when you go 100 feet away from the premises, so you need to make sure that you have an inland marine policy. Also, when you look at contents as a total, you need to look at what you have as your cost in those contents to set the value of your total contents to begin with. And so that's where it's important, I think, for churches to maintain, just like with your home, to maintain uh accurate inventories of these properties.
Absolutely. Um, if we can give them a worksheet and even a video inventory; video inventory works great. A lot of a lot of insurance companies will do that for an insured, but yeah, you know, most people will not remember exactly what they had. You know, we had four hammers and three wrenches uh you know in our toolbox. You know, most people do not know that. And a lot of times when a claim occurs, what does the church insurance company do? They ask you, can you give us the receipts of what we're replacing? So if you have a video inventory and or marketing, you have an inventory period that just helps justify your claim up to that limit.
Jerry, you mentioned this before, but I think it's so important; I don't want to pass over this, and that's to make the distinction, which I think is lost on a lot of church leaders, of market value versus replacement cost. Why is that important, and how should a church respond to that?
Well, replacement costs will actually take the cost to actually replace a building. You may have only paid a million dollars for your church, okay, because that's what the market is worth right now, but to replace it because the building costs it may cost two million dollars to replace it if you were to build it back today. If you insure for market value, you could run into a co-insurance problem again with your your building. However, if you insured for replacement cost, then you can actually replace that building and bring a contractor in where you don't have that issue.
Very good. That's very important. Now, talk about boilers. Um, you know, it's interesting; we had uh we had a boiler blow up at a church; we've also had a boiler blow up at a university uh that we're both very familiar with. Um, if a church has boiler has a boiler, so a hot water vessel, they need to have boiler coverage because if an explosion occurs with that boiler, normally it is going to be the boiler coverage that will apply. Explosions normally are excluded under a property form, so if you have a boiler down in the basement, you need to have boiler coverage. When an explosion occurs, a lot of times it will be the boiler policy that will pick up the coverage for that.
Very good. Well, let's move on to another very important topic under property insurance, and that's the topic of exclusions. Now, an exclusion is a loss that's not covered or maybe not fully covered under the church insurance policy. And Jerry, when we're talking about uh property insurance, there are a number of exclusions that and these often come as a shock to church leadership. They just buy the insurance policy for property, and they think it covers everything, and then and then something happens that and they they find out that they submit a claim to their insurance company only to find out that that's excluded under the policy. It is so important; I think it's probably one of the most important things that you do in evaluating coverage is to look at the exclusion section. A lot of times that's worded in such a way that it's not readily apparent what that means, and that's why it's important to have uh to have somebody, you know, on not necessarily on staff but in your church, perhaps maybe a banker or an attorney or CPA that can help you in interpreting uh exclusions as well as other provisions in the policy to make sure you understand what you have. And and some of the exclusions that apply to property insurance would include, for example, earthquake, uh mold; that's a that's a hot topic today. I was dealing with the church just yesterday that has a mold issue, and uh there's a there's a dispute with their insurance company, and also drain backups. You might want to talk about some of these exclusions.
Uh, yeah, actually, there's a ton of exclusions that are to a policy, and let's talk about first what kind of form you want to have on your policy. I would suggest that every insured have what is called special form, which means that we're going to cover everything except there's also a basic form and a broad form that's that specifically says we're going to cover fire, lightning, windstorm, hail; it tells exactly what it's going to cover. The special form, of course, is more broad because it says we're going to exclude these, where the basic form actually says we're only going to include these. So when you get to um uh but most of them all have common exclusions. Let's talk about earthquake, uh wind, hail, flood insurance; we'll just kind of limit it to those for right now, or mold. Mold; I don't know of a single insurance company that will normally cover mold unless it came from a flood and it didn't get taken care of, then the flood policy will pick it up, but they're really not picking up flood or mold coverage; they're picking up the damage from the flood; the damage occurred because of the flood, and therefore the flood policy will apply to it, but mold is normally excluded on all policies, and I don't know the single insurance company that will normally cover mold. I will I say, let me say this, Jerry, and just to stop you for a second, and the thing about mold, it not only is implicated under the property insurance, but it can be implicated under liability uh or Employment Practices. The church I dealt with the other day, uh they have a staff member who claims that he is no longer he's an associate pastor; he claims that he's no longer able to work at the church because he has a hyper allergy or sensitivity to mold, and he can now no longer work there. And so the church leadership is struggling with this question, and what do we do with this person? Do we do we terminate him? And if we do, uh can he sue us for some type of disability discrimination? And so uh it's interesting how some of these issues kind of overlap into other insurance coverages.
Yeah, that's absolutely true. Um, and we've actually had where we mold a person had was hypoallergenic and did the work; would the work comp cover it because he was still working there? And did the church the church didn't really have the money to try to get to remediate the mold. Mold remediation can be very very expensive, as you know. Um, let's talk about wind, hail, and earthquake. A lot of times if you need that coverage, you can get that coverage if you're coastal or if you're in California or even Missouri here, right there by the Mississippi River. If you need earthquake coverage or if you need wind hail coverage, a lot of times they'll throw a larger deductible, which is normally a percentage deductible on your policy, and but most time you can pick up that coverage. You need to make sure that your agent is not excluding that or the insurance company is not excluding that coverage. Um, flood insurance, if you're in a flood plain, and actually most agents can actually look at a map because the NFIP, the National Flood Insurance Protection Act, will actually have a map of the whole United States and what is considered in a flood plain. If you're considered in a flood plain, you need to have flood insurance because what do you think? It's true that a lot of pastors don't know if they're in a flood plain or not.
No, and they they need to ask their agents to look at the map because most time they build the building, and you may be in a 100-year flood plain. Well, it's never flooded here, but you guys buy the building, and then the flood, you know, then the flood comes. But yeah, you need to actually one of the things that we do for at AG Financial is any insured we have; we automatically check it. Um, we check any loan that AG Financial does; we automatically check on that loan to see if it's in a flood plain to let the company know that that there's a flood issue that may not be covered down the road, so that's one of the things we do. We'll talk about hail damage. Hail damage um actually most time hail is covered under most policies; however, there's called named storm, which is really what I would consider hurricane or tropical storms. If you're not many hailstorms have names. Uh, no, not not many. Now we can give them names, but uh as many as hit Kansas and Missouri uh here, we've had we've had our issues, and a lot of companies now are putting deductibles on just hail because of the amount of hail damage we've had here in Kansas and Missouri uh and other places. You get that basketball-sized hail pounding that on your roof, and you got problems; you've got problems.
Yeah, I had my I had to have my roof replaced here a couple years ago, and you know, I was kind of glad that the hail storm took care of that because it was it was completely covered. Um, let's talk about something that that uh most people would not even think about: how about ordinance of law coverage? If you have to rebuild your building and the laws have changed or the ordinance city ordinance have changed to rebuild that building, you have partial damage to that building, and they say the law the ordinances now say because you have a two-story building, you have to have an elevator, and you didn't have an elevator previously, you're going to have the cost, and an elevator is not cheap; it's going to cost you probably close to fifty thousand to a hundred thousand to put that elevator in, but the city is requiring that. Your normal policy is not going to cover that because you didn't have it before. Ordinance of law coverage will pick up if the ordinances have changed. So if you're in an older building, especially especially if you're in an older building and you know that it is not up to code, you want to make sure that you have ordinance of law coverage.
We also have a question here that I thought I think that we'll address at the same time; it says, um, does my property insurance or cover any building code charges required for city government? We just answered that one. What if I have a large building, multi-story building, that we're not using the whole building, and I don't want to insure the whole building? Is there a way to do this? And actually there is; it's called modified replacement cost, and what you can do is talk to your insurance company; it's normally cost a little bit more, but what you're going to do is say we're going to build this building back as a one-story versus a two or three story. We find in a lot of cities you've got you know people that will occupy a lot of buildings that may have one, two, three stories, and they only use the you know the bottom floor. They can ensure that building not for the complete replacement costs, which may be astronomical with it being three or four or five stories, but you can ensure it where we're only going to want to replace the bottom floor. And so what you would do is you'd figure out what the replacement cost is for the bottom floor, and it's called modified replacement cost, and you can talk to your agent about that. So you would replace the usable portion of the premises, right? And you'd only insurer the usable portion of the premises. So that's a great question; I appreciate that. If you have any questions during this again, let's I'm going to limit it to property; I've already got some liability questions here, but if you have property questions, just feel free to email us; I get them right here, and we'll be we'll try to answer those for you.
You know, Jerry, I mentioned at the start uh how I've seen this happen in a lot of churches: the the selection of insurance coverage is not really an informed decision; it's rather uh you know we have a person in the church that works for Acme insurance company; let's just buy the our coverage from Joe, and that may not be the best uh outcome for for the church. And so let's talk for a minute about the whole issue of church insurance companies versus insurance companies that sell church insurance. You know, we've we've we've got several we've seen several claims that have come in from companies that are not what I would call church underwriters. Exactly what you're talking about; there's companies that specialize in writing non-profits and churches specifically. Um, in my opinion, those are the companies that you really want to try to do business with. So you need to know how you you know one of the things that they can ask their agent is how much insurance what kind of value or what kind of how much volume do you have in writing churches, so you know what kind of expertise that company has in writing churches. We see far too often where um you have somebody picking it up because somebody is an agent for a certain company, and I can write the church, but there is not the proper coverages, whether they be liability coverages or property coverages. I'm sorry, we can't cover stained glass; I'm sorry, we can't cover organs; I'm sorry, we can't we don't have sexual abuse coverage. Um, a lot of times there's companies out there that are not specific uh writers of churches, church insurance, and they don't know how to cover them, so we have issues there.
Let me bring up another topic here that that arises I think in the liability side too, and that's the whole issue of umbrella coverage. Okay, I want to talk about that for a minute. Um, let's talk about how much umbrella coverage you should have. Uh, umbrella coverage actually is a liability form, but we'll go ahead and since you brought it up, we'll go ahead and address it today. What umbrella coverage does will go over your liability limits, general liability, automobile liability, work comp. What it will do is give you an excess of either one million, two million, 100 million, anywhere up normally at a million-dollar increments above and beyond your other insurance to take care of a claim. How many claims have we seen that have happened with national offices, with district offices or regional offices or actually even churches where a million dollars is not enough coverage? And those umbrellas help cover the assets of of that church and a fairly modest increment; it is it's it is fairly reasonable. You know, I know that we were visiting the other day, and and a question came up: how much umbrella coverage do I need? And one of the things that I would say to people is what are the what do you have to lose? And we look at how much people have, what they have to lose, and what actually uh do they have that could cause a large loss? And by we normally will look at that to help determine what kind of limit that they should have. We'll always let them pick the limit but will help determine by at least bringing things to mind, and they can figure out what their risks are.
Let's talk let's talk about builders risk coverage because that's one of the things that we haven't talked about. A lot of churches right now because they can't afford to go build a new church, maybe adding on to their old church, and one of the things that happens is today there's a plethora of air conditioning units being stolen and or the lumber company drops off a load of lumber at the church because they're going to be billing on the inside, and uh they call the next day and uh said, Lumber Company, you need to deliver the lumber; our people are ready for it, and they said we delivered it yesterday. Or how about copper piping? Copper piping is as you know is uh copper piping is number one on on thieves' list right now. You need to have a builder's risk policy or to have your property policy cover theft of building materials; that can be an endorsement that can be added to your policy if you're going through a renovation and or new construction. So builder's risk is something that most people don't even think about that they need to think about if you're going to have some kind of construction or construction project.
Yeah, let's talk about crime coverage too while we're at it. Um, one of the things that most people don't even think about is crime coverage because you're a church; who would steal from the church? How many times have we seen uh the accountant and or uh the head usher that counts the uh counts the money uh they go on vacation, and the monies all of a sudden we have to we have a lot yeah, we have lots of money, and then somebody comes in and does an audit for the church, and we find out that Sally Sue has been stealing from the church for 20 years. We never believed that would happen. And you're not talking normally when this happens; it is over a time period that uh most time we're seeing 20 to 30 years, and the way crime coverage normally reads is the last policy in effect is the only one that applies. So you can't go back and say, well, I had a hundred thousand dollars worth of employee dishonesty uh this year, but I've had it for the last 20 years, so I want a hundred thousand dollars for each year; that work that way. Whoever is the last company to apply is one that happens, and I can tell you that sitting where we sit, uh employee dishonesty, money's insecurities, that sort of coverage is is a is almost a must because you have a large church. There are ways for people to steal and you not realize it. So crime coverage is very very important, and that's a reason why certainly churches above a certain size it's very advantageous for you to have a CPA audit your financial statements because one of the one of the best aspects of a full audit, I'm not talking about limited engagements, is you will receive something called a management letter from your CPA firm, and that's going to outline, highlight all the areas of problems with what are called your internal controls, your handling of cash and resources and assets, and it will help you to institute policies that are going to make embezzlements or thefts much less common. So that to me that's one of the one of the the great reasons uh for having a CPA audit as well as just the the accountability and and making sure that your financial statements accurately portray the finances of the church. Another topic I want to mention, Jerry, because I've seen this happen a number of times is where a church doesn't realize it, but they maybe they
Procrastinated for whatever reason, their policy period has expired, and then there's a loss. Uh, are there grace periods? Or what if your policy is on a calendar year basis, and you fail to renew for the new year, and there's a loss in the first days or weeks of the new year? Normally, there is no grace period, unlike some life insurance policies.
Yes, exactly. If your policy has expired and the loss occurs after that date, um, there may be a 10-day grace period because it's direct bill, and they give you so much grace. I would get that paid uh, immediately before that. Most times, there is a notice of cancellation form that goes to an insurance, to the insured. So a company will notify you if you're paying a payment that our intent to cancel. You need to get that paid before that cancellation takes place, which could be considered a grace period with most companies. But if they haven't received payment and they cancel it as of, and the policy is canceled, once that policy is canceled, they're not going to pay the claim. Um, so we could have a definite issue there. Most companies, uh, I don't really consider have a grace period once the policy is canceled. But until, if they give you that notice of intent to cancel, until that policy actually is canceled, you still do have coverage. Very important point to be calendared on the official church calendar when these policies expire, so you can have plenty of lead time there to not only renew the policy but to make decisions as to whether you want to change coverage in any respect.
Or companies, let's talk a little bit. There's one thing that has happened with a lot of our churches, that a lot of our churches are doing that I only, that I know that most insurance companies uh, would never even think about: garage keepers insurance. You go, "Why in the world would our church need any garage keepers insurance?" If we have at our church, of course we have, where we change oil for the widows and for the elderly, and we'll take their car, change the oil, or we may actually park their car for them. If we damage their car, we need garage keepers insurance to protect that damage to that car. I will tell you that on the, you know, in the Assemblies of God program that we have, we've made that, or not, we've made that an endorsement. But I know of really no other insurance company that will even, that even thinks about it, or most insurance that would even think about it.
Let's also talk about applications and the importance of applications. Um, how you fill out that application will be considered at the time of the claim. So if there's misleading information on an application, there may not be coverage, or they may try to prevent coverage from happening. Recently, we had a church that had a daycare center, but on the application they did not mark the box that said that they had a daycare center. And that was not necessarily intentional; it was just a clerk that worked in the church's office, and here's this insurance application, and she just did not have sophistication when it came to this, and she was instructed, you know, to fill out this application. And I think I'm convinced that that was an oversight; it was not intentional. But the fact was, one of the hundreds of questions that she had to fill out: "Does the church maintain a preschool or child care facility?" And she just passed over that and didn't check "yes," uh, and unfortunately, a three-year-old child died at the child care, in the Child Care Program. And the issue that the insurance company raised was that they don't, that there was no coverage because of the misrepresentation by the church in its application for insurance. They didn't check that box that said, "We operate a preschool or child care facility," and that became a very unfortunate dispute because, as you can imagine, the damages, the potential damages and the death of a three-year-old child at a church preschool, those can be astronomical.
Yeah, it's real important that somebody look over those applications, um, and those, you know, and when they fill out those applications, uh, don't let your insurance agent just fill it out for you. Let them ask the questions, go over the specific questions, um, because, um, that's another reason why also to go with a company that actually writes just churches and non-profits. Uh, there's most likely going to be coverage. This was with a company that does not specifically write churches, and they were more looking for a reason not to cover it versus to cover it. So, uh, why don't you talk a little bit also about the duty to notify?
Oh my, yes, that's true. Under any church insurance policy, including property or liability, as we'll see next month, and that's a duty again; it's in the boilerplate, it's in the fine print of your policy that one of the duties of the insured is the duty to notify, and the duty to cooperate in any investigation by the insurance company. These are conditions precedent to coverage, meaning that if you, if you violate these conditions, if you don't follow them, you're potentially going to lose any coverage. So there have been a number of cases; we'll talk about some of these in more detail next month on the liability side. But if you know of a potential claim, you have a duty to notify the insurance company of that claim or potential loss so that they have the opportunity—the whole purpose for this is they can come in and investigate uh, what's going on—and you're denying them that right by not notifying, and that can result in a lack of coverage.
We got a couple questions. I know we're really running slim on time here, so I'm going to just try to answer these questions. We have an electronic sign on our, on our, on our building. Is it covered? If it's attached to your building, most policies will automatically cover your sign. If your sign is more than 100 feet away from your premises, you need to have specific coverage, and it can be done under an, in the marine policy. Check with your agent. Check with your agent on your side. What is actual cash value? My agent said actual cash value coverage is cheaper than replacement cost. It may be cheaper, but realize that you're only covering the actual cash value of it. So when you have a claim, they're going to take depreciation into, into uh, consideration and only pay you a partial settlement on your claim. So coinsurance again: are you insuring it's a replacement cost, or are you insuring it for actual cash? Excellent. If you want actual cash value and you want that lower amount, uh, then that's fine. I would never suggest it; I always suggest replacement cost. Once again, we appreciate your time, and know I haven't gotten to everybody's questions. We're going to talk about this next month. We're going to pick up all the liability uh, issues that that may occur, and I know somebody, a lot of people ask liability questions; we'll get to those next month where we talk about that topic. We appreciate your time. God bless. Thank you. Thank you.