Purchasing an appraisal from a disinterested third party for insurance reasons isn’t the smallest expense your club incurs during the fiscal year. But in the unfortunate event of a loss, one can minimize the headaches, delays, and the economic hardship associated with a loss by engaging Risk Management. Two important parts of Risk Management is insuring your assets to proper value, and preparing a plan in case a problem occurs. This article touches on Risk Management, examines the features and benefits of an appraisal, three scenarios for your consideration, and a check list when considering appraisal companies.

 

Risk Management

 

Every Club manager experiences this terrible thought, or dreams this nightmare, or as the probability increases over time, lives the reality:

The phone rings, and you get this disturbing feeling. Somehow, you know this is bad. The morning tasks have been completed, and there is no operation that needs your supervision at this particular time of the day. You might even slip a soft “Oh boy.” As you turn on your phone, and observe it’s your assistant manager calling you.

Before you even finish saying “What,” your hysterical subordinate informs you that a building has just exploded, and is burning.

You’re thinking that you were going to take the day relatively easy, but now flashing inside is a ton of tasks to be undertaken, getting to the scene ASAP, damage control, lost revenue, even standing in front of those two hated board of directors peppering entrapping questions your way.

The most interesting concept about Risk Management is that the certainty of something really bad happening to your club property is 100%. As sure as fall creeps in to take over summer, something extremely terrible is going to happen to your club’s structures, machinery, equipment, office furniture and fixtures, signage, fencing, and other personal property. Good Risk Management not only engages prevention, pre planning, and good policy, but also establishes procedure when something does happen.

Risk Management for a golf course actually begins with the course design. Minimizing slips and falls, the errant balls as a result of parallel holes, and proper signage to direct players on where to go, can be addressed by policy. Most insurance companies would encourage you to conduct inspections. They will tell you that making your customers/members aware of what’s happening around them is the single best way to avoid trouble.

Relating to buildings and contents, all clubs face two big issues. First, at what level should the structures and personal property be insured? Second, if there is a claim, how do I approach the burden of proof of what was lost, and how much was it worth?

To allow an insurance company to handle the task of determining what you have lost, and how much money you should receive grants the insurer to “hold all of the cards,” leaving you with little input. After all, insurance companies are in business to make money. If they can have more influence on the considerations regarding payment, the less money they will pay out, while still trying to seem fair. A better approach to these two matters is to conduct an independent appraisal of your club.

An appraisal of your buildings and contents for insurance purposes establishes a current replacement cost (and a depreciated cost based on age and condition entitled either Actual Cash Value or Sound Value) of these assets. Spending the money on a disinterested, third party for property insurance values is beneficial. An appraisal is worth exponentially more if you have to utilize the data for an incurred loss.

The Features and Benefits to Conducting an Independent Appraisal

Minimize Premiums. Insuring your assets to proper insurance values assures that you are not burdened with the wasted outlay of uncollectible over insurance or the need to accept the unnecessary risk inherent with being underinsured.

Accurate Values. The word value has many meanings. Insurance values are not book values found in the general ledger of an entity. Insurance values almost always differ greatly from market values. Using the wrong dollar amounts when determining insurance needs will lead to recovering the wrong dollar amount when dealing with a claim.

Loss Claim Support. The burden of proof of what assets were lost, and how much money it will take to replace it is on the claimant. If there is no proof, meaning no pictures, records, asset list with replacement costs included, the insurance company representative will mostly determine your settlement amount.

Accelerated Recovery. Providing proof of loss minimizes negotiations, and therefore enhances the claims process, which brings payments faster. Reducing down time by just a few days is significant in trying to regain market share, and revenues.

Three scenarios relating to Appraisals.

All three of these club facilities should consider an appraisal. Try and pick out the reasons why and how often a valuation should be considered. See the end of this section for a partial explanation.

Case 1:
You manage a golf course that has a club house with a relatively basic design. The rectangular structure is less than 10,000 square feet, only one floor, with a basement that also doubles as the electric cart charging area. The proshop, the bar/restaurant, the locker rooms, and administration offices are all under one roof.

Your bar/ restaurant does not contain any extremely old pictures, no antique furniture, and lacks custom designed drapes, or specially made furniture. However, the main hallway, from the entrance to the restaurant/bar, holds dozens and dozens of old plaques, small banners and trophies of past winners of open tournaments, dating back to the 1940’s.

The local Rotary Club meets at your restaurant weekly, and they brought in a beautiful antique display case to show the long history of their chapter.

The locker rooms only have three showers, and standard lockers. You trust your insurance agent completely, and after his review of your facility, he runs your club’s statistics through a computer, and presents to you a recommended amount of insurance to buy.

On the course, you have a small snack bar at the turn, three pavilions, and three pole barn like structures for golfers’ shelter from rain.

Case 2:
You manage a country club that was established in 1920. You’re aware that buildings were constructed much differently before the Great Depression. The structure has three floors, and a basement used for storage. The structure has many “nooks and crannies,” around the outside and high ceilings with chandeliers abounding with elegance. It’s part of the reason why so many weddings are booked at your facility, as well as a variety of business lunches.

The club house has the ability to cater to big events. Washing white linens and napkins keeps the laundry department busy. From the golf bag holding room, to the saunas in the locker room, women are separated from the men.

Antique furniture, paintings, mosaics, and statues are found throughout the facility. The crown molding is Honduran Mahogany, and all of the wood trim is Cherry from Central Pennsylvania.

The board of directors is articulate and intelligent. The president is a lawyer, and one board member is in the insurance business.

Your club also has a complete facility at the turn including chairs for those who need to celebrate finishing nine holes. There is a separate cart storage barn, a separate maintenance shop, a caddy shack, and six pavilions around the course.

Case 3:
Your country club is quite popular, consisting of indoor tennis courts, outdoor lighted tennis courts, racquetball courts, lighted paddle tennis courts, weightlifting rooms, and an exercise room. The golf course clubhouse was built in the 1950’s. The club expanded over the years and as a result the rest of the facility was built in the 1970’s. There are three outdoor pools, one is Olympic size.

There was a fire in the restaurant in 1981, and the club had to close, losing two full months of business during the summer while renovating the damaged area. Two managers lost their positions over the incident. The board of directors felt it was best to dismiss the present management, and hire new. It’s been over twenty five years since an appraisal was conducted.

The main facility contains the locker rooms, the bar/restaurant, administration offices, the clubhouse, and two pro shops for golf and racquet sports. One room is a storage room for an antique club collection owned by the golf pro. Members love to look at all the old style clubs. There is a separate building for maintenance and storage of all vehicles, including carts and mowing equipment.

The state of the art irrigation system for the course has its own room at the maintenance building. The water treatment plant also has its own structure.

Considerations for valuation:

Case 1:
The reason for considering an appraisal does not lie entirely with the building. The building itself is not ornate, and does not contain any special construction consideration. Insurance companies utilize software that interprets thousands of past evaluations to determine average insurance values.

What’s inside the building warrants obtaining insurance values even though up to eighty percent of the entities’ worth is in the building. Most of the operations were under one roof, thereby increasing the probability of trouble. The machinery and equipment did not warrant as much appraisal attention, as again most insurance companies utilize statistics for average situations. But letting the insurance companies or the brokers who shop your insurance determine your insurance values is a conflict of interest, and you will not receive the true value of what you lost if you have a loss. It is not wrong to trust your insurance representative, but he/she is not the one you deal with when negotiating a claim.

The old plaques do not hold any intrinsic value, unless a celebrity won the award and donated it back to the club. Policy about what happens to the property owned by the Rotary should be in writing and understood by all parties.

An appraisal would establish baseline values that could be trended for over a decade.

Case 2:
The structures of this facility are obviously distinguished in this traditional, conservative establishment. To define actual insurance values may cost more with these buildings than with Case 1, but possessing this data is crucial if a loss occurs. If this manager did not have proof that there was Honduran Mahogany, the claims adjuster would no doubt attempt to install pine stained to look like mahogany during renovations. And no doubt an elder member of the club will make a detailed inspection after the renovations are complete, and no doubt the manager would be questioned for an explanation of the less than standard workmanship. If there was any club that commanded restoring the building to its original grandeur, this would fit the bill. If for no other reason than for accountability, an appraisal should be considered every five to ten years.

The fine arts and antiques should be valued by an experienced appraiser. No software can calculate the true replacement costs of these types of items. Further, all antiques/fine arts should be cataloged with pictures for further proof of loss documentation, and taken off sight. Appraising all the other structures at the club is relatively secondary in importance versus appraising the main clubhouse and fine arts. The main facility and the fine arts should be appraised more often, since trending becomes skewed over the years.

With the emergence of developing countries like China starving for building materials like concrete, combined with the catastrophic losses associated with the recent hurricanes, the cost of constructing a building has increased 45% over the past seven years. 2006 is the first year that increases have tailed off.

One last note: The person in the insurance business may have knowledge of the industry, but the board is accountable to the members. Following established policies and procedures as opposed to “cutting corners because of inside information” will only prove that one can’t beat the insurance companies at their own game.

Case 3:
While the structures may lack the impressive architecture of Case 2, the total amount of structures lends consideration to conducting an appraisal. In this case, quantity is as important as quality. The expansion in the 1970’s means there are two different architectural approaches, and significantly different insurance values. Documentation is the best way to make sure you receive the correct one.

A question that should be answered in writing is who is responsible for insuring the golf club collection? If some are on display, there could be some confusion on liability.

A club with more members means more activity, and sometimes an increase in the probability of a bad event.

A key here is the fact that an appraisal was conducted years ago. For the management of the club to forsake conducting a reappraisal might have saved some money, especially during tough times when expenses that did not give immediate gratification were considered non-essential. Over the years, as business managers and board of director’s change, the need for another appraisal seemed to fall through the cracks. However, anyone who has had appraisal data available during loss negotiations becomes the biggest advocate of appraisals. They help negotiations conclude faster, and fairly.

Considerations for hiring an appraisal company:

Hire a full service appraisal company. There are many definitions of value, and some valuation firms are limited in their valuation expertise. Can the firm handle fair market valuations of assets, such as a bank might want liquidation values to help determine collateral? How about real estate (real property) valuations? How about being able to help settle an estate of a deceased person? The ability to provide many different valuations on the same assets indicates experience and expertise.

Hire a company that offers a “Loss Report Service.” Some companies are not available to help you in case of a loss. They provide their opinion of insurance values, but then they state in the proposal very professionally that you are on your own in case of a loss.

Check for Errors and Omissions Insurance. Most appraisal companies state in their proposal that they are only liable for the amount paid for the appraisal if the numbers they provide are wrong. Some appraisal companies carry errors and omissions insurance so they can further back up their appraisal data if it is questioned.

Check references. Does the firm have different types of clients? Are these listed clients current or prior? Many firms may show a long list of clients, but it may be misleading, as the list may include entities that chose not to use the appraisal firm.

Use fixed fee companies. Do not allow a company to keep open ended the amount of expenses they will charge you after the conclusion of the work. Reputable companies can successfully determine how much they can charge you before you execute the proposal.

Avoid conflicts of interest. Will the insurance company “pay” for an appraisal? Beware of the word free, especially in the insurance business. Many times an insurance company offers a free appraisal, but you have to buy at least two years of insurance. Often the cost of the valuation is buried in the premium increase for the second year, or the actual appraisal is of poor quality. The only thing that should be free of charge is the proposal for determining values.

Having a comprehensive appraisal performed beforehand by an independent appraisal company is good risk management. Benefits include, but are not limited to, minimizing premiums, accurate values, loss claim support, and accelerated recovery. An appraisal addresses accountability issues, and is a meaningful tool to help managers and directors. Clubs with fine arts and complicated buildings should consider establishing accurate values more often, and make every effort to keep them current.

This article was written for Club Managers Association of America Premiere Club and was featured in their monthly newsletter.