Preserving the Past While Promoting the Mission
By: Joseph Markham and Michael Reiter

Catastrophes never occur at a convenient time, and the absolute worst time to review your insurance coverage is after a loss. Insuring a religious institution's property requires an understanding of its unique mission and circumstances.

After a loss, congregations are frequently hit with a double whammy: their church or temple—a sanctuary for worship, reflection, and fellowship—is destroyed, and their ability to perform their mission within their extended community becomes crippled.

Understanding property insurance coverage and the pitfalls that churches face in the event of a loss will enable you to more intelligently purchase your church's coverage.   Generally, there are four categories of insurance that relate to insurable property: Building, Personal Property, Loss of Income and Extra Expense. Loss of Income and Extra Expense coverage is triggered by physical damage to insured property.

1. Building
Ideally, you would want replacement cost coverage for your structure. A congregation has strong emotional ties to the physical structure where it worships. The architecture tends to reflect the religious beliefs and traditions of the membership. Rebuilding that aesthetic feel of the structure after a loss is extremely important to the congregation.

The problem with replication is that it can be extremely expensive. Many houses of worship are historic buildings. They were constructed in an era of cheap labor and are adorned with craft materials (ornate cut stone masonry, stained glass, plaster walls and ceiling, and intricate millwork, etc.). Their replacement cost is usually far beyond current market valuation and not readily ascertainable from construction industry databases.

How much insurance is enough for the building? There are several strategies for addressing the valuation issue of historic structures. First, you can hire a qualified professional estimating firm to do a detailed estimate of the building. This is probably the most accurate way of establishing value, but it is also the most expensive.

Another approach is to have the insurance company recommend a replacement value.  The insurance industry utilizes a number of standardized databases for assessing values based upon the overall size of a building and established quality parameters. This means of valuing your structure will cost you nothing, but its accuracy is suspect. This approach usually undervalues the replacement cost. If this second option is utilized, then you should make sure that your policy contains a Guaranteed Replacement Cost clause. This allows the insurance company to set the value of the building for premium purpose, while at the same time guaranteeing that the building will be authentically replicated, no matter what the actual cost turns out to be.

If you are looking to insure multiple structures—such as a church, parsonage, and school—consider looking for what is called a "blanket" policy. These policies are often cheaper than insuring each structure separately. Insurance companies can frequently quote lower premiums for this type of policy because the likelihood of all of the structures being destroyed in one event is remote.

One coverage issue that causes quite a lot of confusion is "co-insurance." It is usually identified as a percentage of the insured value (i.e., 100%, 90%, 80%, etc.). Most people instinctively believe that the higher the percentage the better. Actually, the opposite is true. In a nutshell, co-insurance is an agreement between you and your insurance company that you will bear some of the cost of reconstruction if it is found that the amount of insurance that you carried is less than the actual replacement cost of the structure. By accepting a co-insurance clause, you can save money on your premiums. If you choose to do this, make very sure you understand exactly what it is you are agreeing to. One way to avoid the uncertainty of co-insurance is to get an Agreed Value clause in your policy that will nullify any co-insurance.

An important coverage option to consider is an "Ordinance or Law" clause, also referred to as "Code Upgrade." Since many places of worship are historic structures, they do not meet current building codes. Think of handicapped accessibility, sprinklers, emergency lighting, etc. The basic policy only pays to replace what was there, not what must be put back under the modern building codes. The "Ordinance or Law" clause will pay for these required building upgrades. This clause may be subject to value limitations, so it is important to know exactly the available dollar limit for these upgrades.

2. Personal Property
Personal property values must also be identified. Frequently, there is confusion over what items are actually considered personal property. Pews, altars, organs, window treatments and kitchen equipment might be considered part of the building or personal property.  Categorizing these items when purchasing your insurance will eliminate many problems should a loss occur.

One problem with a catastrophic loss is getting an accurate inventory after the loss has occurred. If you have to rely solely on your memory and the memory of your fellow congregants, you will almost always leave money on the table when you settle your claim with the insurance company. It is important to keep either an inventory of personal property offsite or, at the very least, make a video of the church's personal property.

There is one small caveat to personal property; personal property of others that is under the church's care, custody and control is usually limited to $2,500. Many ministers own their vestments and home furnishings. Consider also musical instruments and tools that may belong to congregants, but are usually stored on church grounds. Take a survey of this type of property and adjust your limits accordingly.

3. Loss of Income
While many of us do not like to think of our places of worship as businesses, it is helpful to understand the insurance issues that may arise in the event of an insured property loss.  Specifically, let's think about your place of worship as a not-for-profit business. On a very basic level, some people believe that since their church or temple is a not-for-profit institution, why should they carry Loss of Income insurance? The simplistic answer is because Loss of Income insurance insures cash flow, not profits.

Whenever there is catastrophic loss, attendance dwindles and, consequently, contributions do as well. In simplistic terms, Loss of Income insurance will make up the difference between your cash flow before the loss and your cash flow afterwards, until such time as repairs to the structure should have reasonably been completed.

4. Extra Expense
When you have a Loss of Income policy, you are also given the option of purchasing Extra Expense coverage. For religious institutions, this coverage is actually more important than their Loss of Income insurance. Extra Expense coverage provides the insured with reimbursement for expenses above and beyond those normally incurred.  This is very broad coverage in that it reimburses 100% of extra expenses used for maintaining your normal operations until such time as the physical damages should have reasonably been completed. There is no limit of liability for Extra Expense coverage.

With a catastrophic loss, extra expenses will almost always be greater than lost revenues.  The rebuilding of a church can easily take more than two years to complete. During that time, to maintain the congregation and community outreach programs, Extra Expense coverage will cover rental of halls for services, classrooms for instructional purposes, offices and living accommodations for the minister or resident staff. Personal property such as chairs, desks, organs, etc. may also be rented. No religious institution should be without Extra Expense coverage.

When your religious institution is shopping for insurance, you should work with a broker who represents multiple insurance companies and who writes a substantial amount of coverage for either churches or businesses. Religious institutions have sophisticated insurance needs. The time spent reviewing your policies is well worth it.

Joseph Markham is Licensed Public Adjuster, Corporate Counsel, and Michael Reiter is Licensed Public Adjuster and Director of Young Adjustment Company, an 80-year-old public adjusting firm representing insureds to their insurance companies when suffering major losses due to insured perils.