Private Club GMs certainly have enough on their minds to keep them up at night; what with staffing issues, grounds maintenance; HR challenges, etc. But probably the one thing they don’t think about—but certainly should—is whether or not they have enough insurance in place should a disaster befall their Club. And it’s doubtful that was on the mind of the General Manager of the famed Oakland Hills Country Club in southern Michigan on February 17, 2022, the day a devastating fire swept through the club, engulfing the entire two-story frame clubhouse and causing massive structural damage and the roof to collapse. Speculation is that the fire’s origin may have been in the walls and between the floors, or in the attic which delayed activation of the sprinkler heads. By the time the sprinkler activated the fire was out of control.
The Board of Directors unanimously voted to rebuild the clubhouse. But was there enough insurance coverage in place to rebuild? Insurance issues faced by the Oakland Hills Country Club, or any club that suffers a total loss, are likely to focus on various areas of concern:
Building valuation and adequacy of insurance limits
Building values are often not updated each year, but are rolled over from one year to the next. If the Completed Statement of Property Values show the value unchanged from expiring, there will likely be an under reporting of building replacement costs. Need more motivation to fully consider the increase in building construction costs? Consider that 2021 saw an average nationwide increase of 20%.
Over reliance on Blanket Limits as a margin of safety
Blanket Limit is a total of all building values (taken from Statement of Property Values), with typically 80-85% of total building/structure values attributed to the Clubhouse. But is this margin sufficient to avoid under-insurance? Ultimately, failure to consider the real possibility that a single occurrence could damage or destroy more than one building can result in a total loss, even when the building is sprinkled, as we witnessed with the Oakland Hills disaster
Failure to understand the Coinsurance Provision
The Coinsurance Provision provides for rate adequacy with Replacement Cost Values determined by the Claims Adjuster at time of loss. The Insurance policy requires that the Building Values be reported at 100%. A Coinsurance penalty applies if the Building Valuation is insured for less than 100%. If the Building value is reported, for example, at only 80% to value, the insurer pays only .80 of every loss dollar and the Club pays .20 as a coinsurance penalty, resulting in an insurance shortfall. Your Club can avoid this problem if you have an Agreed Value to waive the coinsurance, which means you should get an appraisal to establish Replacement Cost for the buildings. When was the last time you had an appraisal? This is even more important in a period of unprecedented inflation that has driven building costs to new highs. Did you know construction costs for a typical Clubhouse in Southern California is $500-$600 per square foot? What happens if there is an inadequate insurance recovery? How do you explain this to the Board and membership?
Business Income Coverage
When there is a loss triggered by a direct physical loss or damage to real or business personal property, this insurance coverage pays for loss of net income (for non-profits: revenue less expenses) and continuing expenses incurred during the period of restoration.
How to complete a Business Income Worksheet:
First, project annual business income values by:
〉 Identifying sources of revenue that would not continue during a business interruption (do not include membership assessments or fees)
〉 Estimating the revenues for the next 12 months
〉 Subtracting out the cost of goods sold (supplies, merchandise, food, beverage) from the total
〉 The result is the Business Income Annual Value (not the limit)
Second, determine the period of restoration to arrive at the insurance limit. It is the time needed to return the Club to pre-operational loss levels. Underestimating the period of restoration is common.
Allow for:
〉 Loss Adjustment: claim settlement process – both Direct and Business Income losses
〉 Restoration Process:
- Pre-construction: develop and approve building plans; waiting for building permits, and clearing the site: demo, debris removal
- Actual reconstruction of the building. Consider weather delays, labor, and material shortages. Often, architectural design features, like those found in the Oakland Hills clubhouse, take more time to replicate.
Most Clubs’ estimates are based on actual reconstruction time only leading to more potential for under insurance.
Third, calculate the insurable limit:
〉 If 12 months are needed to restore operations, use the entire annual Business Income Value.
〉 If 18 months, use a factor of 1.5 times the annual Business Income Value.
〉 If 24 months, use a factor of 2.0 times the annual Business Income Value.
Most insurance carrier Business Income Forms end coverage at 24 months.
Oakland Hills CC gives initial estimates to rebuild the Clubhouse at “a couple of seasons.” In Michigan, a golf season runs from April 1st to October 31st, thus 24 months to build. But this does not consider application of a Coinsurance penalty. It is strongly advised to secure a No Coinsurance form or Agreed Value to waive any coinsurance.
In addition, a claim process is often involved, although bear in mind that business income claims are more difficult to settle. Historical data, forecasting, interim financial statements, and budgets are used to help establish the loss. Revenue decline unrelated to the loss itself, such as a pandemic shutdown coinciding with the period of restoration, is not insurable. If your Club does not have the expertise to negotiate a settlement, consider the role of CPAs and Public Adjusters. And trust me; it will take longer than you think.
〉 What would YOU do in event of a major loss to your Clubhouse?
As previously stated, you will need Business Recovery Planning in order to minimize the time to rebuild and resume normal business operations. Fortunately, there will be some continuation of revenues as you will likely be able to keep the golf course open even if the Clubhouse is destroyed.
Take all these steps to minimize the possibility of having inadequate insurance needed for recovery, and avoid the temptation to renew as is or with only minimal changes. Take the time to learn the different coverages; what you have, what you don’t have, and what you need. Be sure to provide renewal information in a timely fashion to your insurance agent. But perhaps the best advice… plan for the worst-case scenario. Then, make sure you’re ready to deal with it.
