A gift of property can be very generous, but it can also be very costly. Donated properties can seem like free gifts that are full of potential, and municipalities are often eager to accept these gifts. However, cities and towns need to consider the possible inherent risks associated with the property and determine whether the benefits outweigh those risks. It is crucial to carefully consider potential real estate donations to avoid any unpleasant surprises and negative consequences. Many are vacant, in need of significant repairs, or have hidden hazards. Preexisting damage repair costs can easily exceed the current value of the building based on its condition, even before a disaster.
When considering a donation, municipalities should consider whether it meets the requirements of their property donation procedure. This will ensure consistency, determine immediate and ongoing costs, and evaluate the suitability of the property for municipality use. Include the city’s risk coordinator and attorney in the process from the outset to help identify and address exposure concerns early.
Municipalities should also contact SC Municipal Insurance Risk and Financing Fund to discuss how the property addition may impact coverage or premiums before deciding whether to accept the donation.
Cities or towns should inspect the property to observe its condition, the nature of the surrounding properties, and how factors could impact the property’s use. The inspection will help determine costs for maintenance and repair. It will also uncover any preexisting damage to the property, which could create necessary costs that exceed the value of the building.
Municipalities should remember that property insurance policies are designed to cover fortuitous events, or damage occurring suddenly and accidentally. Like most property insurance policies, SCMIRF generally excludes losses caused by “gradual” damage. Corrosion, deterioration, erosion, evaporation, inherent vice, which is something that causes a property to damage or destroy itself, latent defect, leakage, loss of weight and rust are all excluded in the SCMIRF coverage contract.
Buildings with preexisting damage are more prone to damage when they have not been maintained or have been vacant or unoccupied for long periods. Even though uncovered perils may not manifest themselves until a disaster occurs, insurance will adjust these losses according to the language of the coverage contract, which generally excludes “gradual” losses and preexisting damage.
Insurance policies are designed to place the insured back in the same position it was in before the loss occurred. SCMIRF, like numerous commercial property and homeowners insurance companies, provides replacement cost valuation unless another form of valuation is chosen by the insured. Replacement cost is the cost to repair or replace property at the date and time of loss with materials of like, kind and quality. Replacement cost coverage seeks to make the policyholder “whole again” based on the pre-loss value. The pre-loss value reflects preexisting damage.
Preexisting damage to insured property does not always mean that the insurer will deny a claim in its entirety. The insurer will pay the claim but exclude or deny the cost to repair the preexisting damage. It can be difficult and time-consuming to determine the value of the preexisting damage after a disaster like a hurricane.
For more information about SCMIRF’s coverage of donated buildings, contact Robert Collins, underwriting manager, at rcollins@masc.sc or 803.933.1279.