Last month I told you of the nine broad areas of exposure that you as a business owner should be concerned with, in this article we will look at the first of these, Property Insurance.
During the operation of your business you will either own property or have in your “care, custody, and control” other people’s property. It may be buildings, improvements, equipment, inventory, goods in transit, earnings, etc. Let’s say the worst happens: a fire breaks out and you lose your inventory; a hurricane sends a tree smashing down onto your office; your business is burglarised, how do you recover from any one of these disasters? The answer is Property Insurance.
Property Insurance protects your business against physical damage to, or loss of, your assets by theft, accident, or other means. Assets, broadly defined, include the area in which your business operates and the property housed.
In the case of catastrophes like fire, explosion, theft, or vandalism, property insurance helps cover your costs – whether it’s to repair damaged property or replace what you’ve lost. So, your ability to recover from any one of these disasters is heavily dependent on your property insurance.
Because every business is vulnerable to property damage or loss at any time, this insurance is one of the first things you should buy when you start a business. No business should open its doors without first obtaining appropriate property insurance.
The first thing you would want to do is to take a complete inventory of all your business property, determine its value, and decide what’s worth insuring. For example, you’ll want to make sure your building is covered, as well as your inventory, furniture, equipment, and supplies. Even if your business rents space, your lease might require certain types of insurance coverage that you must carry.
If you don’t own your building, you’ll simply need contents coverage. Just because the building owner carries all the necessary insurance on the building in which you operate, doesn’t mean it will cover any of your equipment, furniture, and other business possessions.
Here is a checklist that provides some guideline to the property you should consider covering:
- Buildings and other structures, leased or owned
- Furniture, equipment, and supplies
- Leased equipment
- Inventory
- Money and securities
- Records of accounts receivable
- Improvements and betterments you made to the premises
- Machinery
- Boilers
- Data processing equipment and media, including computers
- Valuable papers, books, and documents
- Mobile property, such as automobiles, trucks, and construction equipment
- Satellite dishes
- Signs, fences, and other outdoor property not attached to a building
You can purchase Property Insurance on the basis of the property’s actual value (the replacement cost minus depreciation), its replacement value (the cost of replacing an item without deducting for depreciation), or on an agreed-upon amount (commonly used for art objects and other unique items). You must always bear in mind that the insurance of property is based on its value, however that may be derived.
There are “co-insurance” penalties for failing to insure to full value and these penalties will be applied to any claim. The determined value of your property is important for both calculating the premium and paying claims.
You can structure your Property insurance coverage several ways, and the premiums you pay are based on how comprehensive your coverage is. You can chose to have either of two type of coverage, “Named Perils” and ﾓAll Peril.ﾔ Events that do damage are known as perils or causes of loss., and include weather-related events such as lightning strikes or hail, or human causes such as robbery or vehicular accidents.
ﾓNamed Perilsﾔ names each peril to be insured against, such as fire, explosion, aircraft damage, windstorm, etc. Other perils may be added along the way. While “All Risk” provides coverage of all perils except those named in the “Exclusions” of the policy. Therefore, the exclusions are an important part of the All Risk policy.
Since the ﾓAll Riskﾔ policy affords better protection, it is more expensive to purchase than the ﾓNamed Perilsﾔ policy. The difference between ﾓNamed Perilsﾔ and ﾓAll Riskﾔ is a typical example of the kind of thinking and interpretation you must apply to understanding how your insurance policy will cover your business. An ﾓAll-Riskﾔ policy is usually sufficient for the average small business, but keep in mind that all businesses, and thus their insurance needs, are different. Remember, your agent is there to help you in understanding your coverage.
If you’re wondering how the premiums you pay are determined, you’re not alone. The major factors affecting premiums include the type of building structure, the presence or absence of safety systems, and the location of your property. Just as insurance companies give preferred rates to better drivers and non-smokers, they also award businesses for burglar alarms, smoke detectors, sprinkler systems, and other measures that protect against loss up front. If your business operates in a manner that you think lower your risk for property claims, speak to your agent to see if you can qualify for additional breaks on your annual premium. With this in mind, it is important to take whatever steps you can to minimize your exposure to loss, as these will affect you premium and ability to get coverage.
Because of deductibles, dollar limits you agree to absorb in the event of a loss, and other ways of sharing the burden of coverage, you should be prepared for how the insurer will handle a claim. Large deductibles, although they afford a reduction in premium, can have a critical effect on your cash flow if you are operating on and have access to very little capital. Also, you cannot rely on insurance to always or completely cover your losses.
Frequency of claims will have a definite and sometimes harsh effect on the insurer’s willingness to continue to insure your business. Although business-owners generally purchase replacement cost coverage, insurers often limit their initial compensation payment for loss to actual cash value until such time as the owner has replaced the items lost. The policy, itself, will define the time frame to start the process of replacing items, generally twelve months. This method of handling claims is prevalent and you should be prepared to make up whatever difference between the value of your loss and what the company legitimately pays. Obviously, the best preparation includes taking necessary measures to minimize or eliminate losses in those areas where you have control.
Deductibles for property insurance can be calculated on a per-claim or on an aggregate basis. The out-of-pocket cost for per-claim deductibles is often lower, so if you’re in a business that has a relatively low chance of filing a claim, you might consider this. Companies with a lot of claims would do well to consider calculations on an aggregate basis.
Make sure the full value of an item is insured and check the terms for reimbursement. Just because you may have $1 million in coverage doesn’t necessarily mean the whole amount is going to be applied in a given category of property. Also, think about whether or not you want the policy to automatically renew each year. If your company has a variable growth pattern, you may want to adjust your coverage annually.
Unfortunately, without Business Insurance, no business is immune to the risks posed by theft, vandalism, fire, flood, and natural disasters. But when your property is properly insured, you can feel confident you will resume operations quickly, even if a catastrophe strikes your place of business. Yes, you will object when you see your annual insurance premiums, you will probably think they are too expensive. But, if you ever have a substantial claim, you will quickly see that buying the coverage was the greatest value going.
