It is becoming increasingly unlikely that Minneapolis will be able to recover from the rioting of May and June. The reason? They won’t be able to afford to rebuild because companies’ insurance won’t cover the damages. From the Star-Tribune:
Private insurance won’t come close to paying the cost of rebuilding what was lost in the riots following George Floyd’s death.
Though Gov. Tim Walz has estimated that total losses will exceed $500 million, insurance companies have informed the Minnesota Department of Commerce that they will be covering a maximum of $240 million in riot-related damage. In the 5-mile stretch of Minneapolis that sustained the heaviest destruction, uninsured losses among local small-business owners are at least $200 million, according to the Lake Street Council.
2020 has been sort of a perfect storm for insurance companies. When you add people letting their policies lapse during the lockdowns, business interruption claims, claims from the rioting, claims from California’s fires, and, now, claims for hurricane damage, it comes to a heckuva lot of claims and lost revenue. I won’t be surprised if we start hearing pleas to bail out the insurance industry.
For those unaware. When an insurance company pays you for a catastrophic loss you have all the issues Dave cited, but you also have the difference between the (depreciated) tax basis of the firm, and the claim payoff. That is, its a deemed sale of the business in the IRS’ eyes, with taxes owed on the difference.
As a general proposition that makes it very, very difficult to replace the assets required to operate the business.
The implication is obvious. Many will not return. But at least the fires and looting were mostly peaceful. Only a few dead. So you gotst that……..
And when Calamity is sworn in she can sign a bill of attainder confiscating all of OMB’s assets along with that of his richest supporters and send the money to the community organizers in the peacefully looted cities for them to spend equitably.
@Drew, I’m not familiar with that rule, but if the business owner plows the money back into a rebuild, the insurance payout is not taxable, right? If so, there is an incentive to avoid taxes, but reading btw/ the lines on the anecdotes in the news story, there are a lot of old buildings that were cheap to own/lease, and the insurance payout wouldn’t offer much toward a rebuild anyway, which would likely be subject to more stringent building code.
I think the bigger issue than taxes may be if the insurance policy only covers actual cash value for assets and not full replacement cost.
I learned my lesson on that and generally insure for replacement value even though that makes the policy more expensive.