How do you protect your church property?

During the past nine months, fire destroyed or damaged more than a dozen United Methodist church properties across the United States. Paul Stephens is vice president of marketing and risk-management services for The Church Insurance Agency Corporation, a service provider to United Methodist Insurance. UMI is a wholly owned, nonprofit subsidiary of the General Council on Finance and Administration of The United Methodist Church. Here is a list of points that Stephens urges all churches to consider.

Market value vs. replacement value

Understand the difference between market value and replacement value when buying or evaluating your insurance policy.

The market value is the price at which the church building could sell on the open market today. The replacement value is how much it would cost to rebuild the structure to its current state.

It is not unusual for a church to be worth, say $600,000 at market value, but to have a replacement value of $1.5 million.

Church leaders must understand that in the event of a total loss, it is imperative to have the buildings insured to full replacement value if they would want them completely rebuilt.

The congregation obviously will pay more to insure the property adequately but nothing like what it would pay if it found itself underinsured. Also, there is a significant impact to the church for a partial loss. For example, if the roof is damaged by hail and the building is only insured to 40 percent of its actual replacement value, the claim payment will be depreciated accordingly. This can have a significant impact on ministry dollars.

What to consider when purchasing insurance

First, church leaders should only purchase coverage from companies that specialize in church risks. Some of these companies are United Methodist Insurance, Cincinnati Insurance, Church Mutual, Brotherhood Mutual and GuideOne.

By doing this, the church deals with carriers that understand the intricacies of church claims and coverage issues. Too many times, we see congregations purchasing coverage from non-church carriers and experiencing disappointment when a big claim occurs. While most of these non-church carriers are good at insuring personal autos, they rarely provide the coverage and limits required to indemnify a church fully when the unthinkable happens.

Remember, you can always buy less coverage for less money, but it is not a good idea. A wise trustee once told me, "All insurance policies are the same until you have a claim." He was right.

Second, after narrowing your field to church carriers, the congregation should determine minimum insurance requirements in terms of what constitutes acceptable coverage limits.

Even in the church-insurance market, you will find wide variations in the types and levels of coverage provided. In terms of church property, the congregation should require each company to complete a "replacement-cost appraisal" and match the results to reality in that ZIP code. For example, if one company says it can replace your buildings based on a cost per square foot of $80 and the others indicate $165 per square foot, you should be suspicious. Church buildings can vary widely in their replacement value but generally fall in the range of $150 for simple construction all the way up to $500 or more per square foot for ornate cathedrals or historic structures.

Once the congregation has proposals from carriers, based on current appraisals, do a reality check. Could the buildings actually be replaced completely for this amount of coverage? Ask a local contractor or architect to confirm that the cost per square foot is reasonable. In addition, take into account permanently affixed items considered part of the building such as stained-glass windows and pipe organs.

Keep in mind that just because the policy states that you have "replacement-cost coverage," it may be inadequate if the limit is incorrect. Additionally, remember that the difference between the market value, which is the real-estate price, and the replacement value of a church building can be huge.

Risk management and adequate risk transfer

When it comes to property losses such as fire, a combination of "adequate risk-management" techniques and "adequate risk transfer" can go a long way.

The concept of risk management often frightens laypeople as it sounds very complex, which it can be. However, most congregations can do many things to prevent or reduce the potential fire claim. In the language of insurance, preventing a fire claim is referred to as loss avoidance and reducing a claim is called loss reduction.

There are small things that I refer to as "low-hanging fruit" that churches can address for little or no expense. These include proper housekeeping, proper storage of flammables, proper use of electricity in terms of avoiding extension cords, installation of smoke detectors, clear exits and proper lighting. Additionally, lightning rods, sprinkler systems and monitored central-station fire alarms, while more expensive, can substantially limit the severity of a fire.

Transferring the risk

Risk transfer involves transferring the inherent risk of ownership to another party, usually by purchasing an insurance contract. While paying for insurance can be a struggle, the big issue is buying adequate insurance limits.

Unfortunately, in several recent fires, we have seen the recurring theme of the church being underinsured and unable to rebuild completely. This puts a huge strain on ministry in terms of people and resources.

Often, laypeople are very price sensitive, which is understandable. However, they may make insurance decisions strictly on price without appreciating fully the most important aspect of insurance, which is coverage. A church may save $1,000 in premium but, as a result, take on a $1-million uninsured claim.

For more information, go to the United Methodist Insurance website or contact UMI by phone at 800-975-5442.

News media contact: Barbara Dunlap-Berg, Nashville, Tenn., (615) 742-5470 or [email protected].