Lessor’s Risk Insurance: Is Your Building Undervalued?

You own the buildings. You’ve got tenants, leases, and a lender who wants to see proof of coverage. When the renewal came in, the number looked reasonable, maybe even lower than last year. That feels like a win. But if your lessor’s risk insurance policy lists your buildings at less than what it would actually cost to rebuild them, that “good deal” has a hole in it. And you won’t find the hole until the day you file a claim.

We worked with a property owner not long ago who had three older strip centers. When we talked about building values, his first reaction was, “Well, they’re not really worth that much.” And that’s a fair instinct. On the open market, older strip centers may not sell for much. But that wasn’t the question. His policy was written at replacement cost, and replacement cost means one thing: what it would take to rebuild those buildings today, with today’s materials and today’s labor. What they’d sell for has nothing to do with it.

In the end, he went with a lower quote somewhere else. We lose accounts that way more often than you’d think, and we’re okay with that. We’d rather tell you the real number and lose the sale than write a policy we know won’t hold up when you file a claim.

We review commercial property policies every week at GIBB Insurance Services, and undervalued buildings are one of the most common problems we see. It’s rarely the owner’s fault. Usually, somewhere along the way, someone kept the premium down by keeping the building values low. Here’s why that matters, and how to make sure it doesn’t come back to bite you.

What Lessor’s Risk Insurance Covers

A lessor’s risk only policy (often called an LRO) is built for property owners who lease their buildings to tenants. It covers the building itself and your liability as the owner, while your tenants carry their own coverage for their contents and their business operations.

It’s a straightforward policy on paper. The part that gets skipped is the most important number on it: how much each building is insured for.

Replacement Cost vs. Actual Cash Value: Which Number Are You Insuring?

Every commercial property policy values your buildings one of two ways, and the right building value depends on which one you have.

• Replacement cost pays to rebuild or repair with new materials, with no deduction for age or wear. If your policy says replacement cost, your building value needs to reflect the full cost to rebuild today.
• Actual cash value (ACV) pays replacement cost minus depreciation. An older building insured at ACV can carry a lower value, but every claim pays less too. A 20-year-old roof damaged by hail may only be worth a fraction of what a new one costs.

The mistake we see most often is a mix of the two: a policy written at replacement cost, with building values that look more like what the property would sell for. That’s how an owner ends up paying for replacement cost coverage and getting penalized at claim time anyway, because the coinsurance clause measures you against the full rebuild cost.

If ACV makes sense for an older building, that’s a legitimate choice. It just needs to be a choice you make on purpose, with your eyes open, not something that happens by accident. The Texas Department of Insurance also walks through these coverage types in its commercial property insurance guide.

The Coinsurance Clause: The Fine Print That Shrinks Your Check

Most commercial property policies include a coinsurance clause. In plain terms, it’s a deal you make with the insurance company: “I’ll insure my building for at least a certain percentage of what it would cost to rebuild.” Usually that’s 80%, 90%, or 100%.

If you keep your end of the deal, claims get paid the way you expect. If you don’t, the insurance company reduces your payout by the same proportion you came up short.

What That Looks Like in Real Numbers

Say your building would cost $2,000,000 to rebuild today, and your policy has an 80% coinsurance clause. That means you’re required to carry at least $1,600,000.

But your policy only lists the building at $1,000,000.

A hailstorm and the water damage behind it cause a $400,000 loss. You might assume you’re fine, since $400,000 is well under your $1,000,000 limit. Here’s what actually happens:

That’s the part most property owners don’t realize. Being underinsured doesn’t only hurt you in a total loss. It shrinks every claim, including the partial ones that are far more likely to happen.

Why “The Risk Is Low” Is the Wrong Way to Think About It

We hear this a lot: “What are the odds I lose a whole building?” And it’s true, a total loss is unlikely in any given year.

But commercial property claims aren’t small. A roof on a strip center, a fire in one tenant’s suite, a burst pipe that soaks three units: these are six-figure losses, not four-figure ones. The chance of a claim may feel low, but the dollar amount when it happens is high. When a coinsurance penalty takes 30% or 40% off a six-figure check, that’s real money coming out of your pocket, or out of your lender’s patience.

When You Own More Than One Building

If your lessor’s risk insurance covers several properties, the exposure multiplies.

• One storm can hit them all. In DFW, a single hailstorm can damage every roof you own in the same afternoon. If every building is undervalued, every claim gets cut.
• Blanket limits don’t fix bad numbers. Many owners with multiple buildings carry a blanket limit, one total amount spread across all locations. That’s a good tool, but the blanket is built from your statement of values. If those values are low, the whole blanket is low, and the coinsurance math still applies.
• Values drift every year. Construction costs keep climbing. A building that was valued correctly five years ago is very likely underinsured today if nobody has updated the number.

Why Buildings End Up Undervalued in the First Place

In our experience, it usually comes down to one of these:

• The value was based on the wrong number. Purchase price includes land, which you don’t need to insure. Tax appraisal value isn’t rebuild cost. Market value isn’t rebuild cost. The only number that matters is what it would take to rebuild the structure today.
• Nobody has updated it. The value was set years ago and rolled forward at every renewal.
• The premium was the priority. Lower building values mean a lower premium. When a policy is shopped purely on price, building values are one of the easiest places to quietly cut, and the owner often has no idea it happened.

That last one is the hardest to talk about, but it’s the honest truth. A cheaper quote isn’t always cheaper because the agent found a better deal. Sometimes it’s cheaper because there’s less coverage underneath it.

How to Value Your Buildings the Right Way

Doing it right isn’t complicated. It just takes someone willing to look.

1. Start with replacement cost, not market value. Your agent should be using a commercial valuation tool or a recent appraisal based on square footage, construction type, age, and local building costs.
2. Ask about agreed value. On many policies, if you submit a signed statement of values, the carrier will suspend the coinsurance clause for that policy term. It’s one of the best protections a property owner can have, and it’s often available just for asking.
3. Look at ordinance or law coverage. On older buildings, the city may require code upgrades when you rebuild. That cost isn’t automatically included, and it can be substantial.
4. Don’t forget lost rent. If a building is unusable after a loss, your tenants may stop paying. Loss of rents coverage keeps your income coming while repairs are made.
5. Review values every year. Build it into your renewal, the same way you’d review your leases.

Know Your Real Number Before You Need It

You worked hard to build or buy these properties. Insuring them at the right value is how you make sure the policy you’ve paid for actually pays when you need it. Our commercial team writes lessor’s risk insurance for property owners across DFW and The Woodlands, and we’ll walk through your buildings one by one: how they’re valued, whether replacement cost or actual cash value fits each one, and where the coinsurance clause could catch you.