An ounce of prevention Featured

8:00pm EDT May 23, 2005
The town is reeling after a series of small twisters tore through the county last night. As soon as roads are drivable, Tim heads toward his place of business, unsure what awaits him.

His worst fears are soon confirmed. The building housing Tim's business -- the source of his and his employees' livelihood -- has suffered significant damage.

Now what? It's hard to think clearly as Tim mentally notes each problem. He's not even sure where to start. He calls his insurance agent, who begins sorting through the claim.

Tim hopes his insurance policy, particularly the property insurance, includes the right types and amounts of coverage. If it doesn't, a loss like this could easily lead to business failure. Luckily, Tim understood the importance of adequate coverage. He and his agent had thoroughly discussed Tim's business and the right way to cover each aspect of it.

Once his agent contacted the insurance company, Tim moved smoothly through the claim process and business operations were quickly restored.

Through planning, Tim and his agent took the steps necessary to ensure continuation of his business. In particular, Tim understood his building needed to be insured to value. But what if he hadn't known the importance, or even chose to ignore it?

In that case, he would have suffered a coinsurance penalty in the event of a loss.

What is coinsurance?

A coinsurance clause specifies the amount of insurance you have agreed to carry in relation to the building's actual value. Typically, this limit is 80 percent to 100 percent of the cost to replace or reconstruct the building.

If you don't carry the limit mandated in the coinsurance clause, you will pay a coinsurance penalty in the event of a partial loss. In other words, the company will only pay a claim in proportion to the amount of insurance you do carry.

Let's say Tim chose to purchase a $1 million limit of insurance for his building. But at the time of loss, it's discovered that the actual building replacement cost is $1.5 million. Will Tim pay a price for this error?

He will . . . literally.

In our example, damage is estimated at $900,000. However, the claim payment will only be $600,000 (the $1 million limit is two-thirds of the actual 100 percent replacement cost of $1.5 million, so the claim payment is two-thirds of the actual loss amount). Tim will have to come up with the additional $300,000 on his own.

Even if a policyholder avoids the coinsurance condition by purchasing agreed value coverage, an agreement to suspend the coinsurance clause, usually for a period of one year, an appropriate limit of insurance (between 80 percent and 100 percent of replacement cost) is still required.

Insurance to value is just one aspect to consider when it comes to insuring a building. There are other issues (such as removing building debris and factoring in the cost of bringing a building up to code) that a business owner should recognize and plan for.

And beyond building coverage, loss to business personal property and loss of business income can have a huge impact on business continuation. That's why it's important to make sure, as Tim did, that you have discussed your operation thoroughly with your insurance agent.

Adequate property insurance protection for your business is not as simple as buying an off-the-shelf policy. Analyze your needs and minimize uncertainty by making the right decisions before you're faced with a situation like Tim's.

Steve Blankenship is manager of the Underwriting Practices Group at Westfield Insurance. Reach him at (330) 887-8417 or In business for more than 156 years, Westfield Insurance provides commercial and personal insurance services to customers in 17 states. Represented by leading independent insurance agencies, the product it offers is peace of mind and its promise of protection is supported by a commitment to service excellence. For more information, visit