To manage the risk of loss to commercial property, business owners can self-insure (absorbing any losses), transfer the risk to someone else or buy insurance. But not everyone is insurance savvy, understanding exactly how property is covered and what triggers coverage.
“When it comes to business building and personal property coverage, it’s important to have an insurance broker who takes you through the what ifs,” says David Oliver, senior vice president at Momentous Insurance Brokerage, Inc. “If the broker understands exactly what assets you have, what you do, how you do it and where you do it, you should have the proper coverage, insured for the right values.”
Smart Business spoke with Oliver about insuring for the correct perils, before it’s time to make a claim.
What types of business property insurance are available?
A named peril policy covers only specified perils; a basic or broad form policy will cover a longer list of specified perils; and special form covers anything that is not specifically limited or excluded. Most businesses start with a special form policy. Then, if it excludes something you want to cover, you can buy off the exclusion or have it added for an additional premium. Other times, you’ll need to buy a separate policy, such as a difference in conditions or builders risk policy, to cover that risk.
Usually a property policy covers direct physical loss or damage to the building and/or personal property at a certain named location(s). However, if you have a business where you’re moving around, touring or traveling, you can get an inland marine floater to cover property. This can be added as an endorsement to a business property policy or bought separately, and isn’t designated to one premises. It’s essentially floating, so you have coverage no matter where it goes. It also might have broader coverage, such as earthquake and flood.
What’s typically covered on property policies?
Sometimes, when you go to court, if a policy is silent on a particular peril, it may be deemed covered. Judges tend to lean in favor of the insured, especially in California.
It is critical to understand what your policy excludes. The policies are usually definitive when they tell you what’s not covered; they want you to know what the exclusions are. Where they may tend to be vague is in the area of what is covered. Basically, the policy covers actual, unintentional physical loss to the asset, such as if there’s a fire or something gets broken, vandalized or stolen.
How can business owners make sure they have the right coverage?
Read your policy carefully to understand what’s excluded, covered and not covered. Policies are complicated, so this is where a good broker helps. Make sure that whatever you think you’re buying the insurance for is actually covered. Usually, you can get a business personal property policy endorsed to cover excluded perils like earthquake sprinkler leakage, even though you can’t get full earthquake coverage.
When it comes to triggering coverage, insurers look for the proximate cause. If what directly caused the damage is covered, then you have a claim. You may not have earthquake insurance, but if an earthquake broke a gas main, which caused a fire, you’d have coverage for fire-damaged equipment. The policy needs to insure for the cost to repair, rebuild or replace something.
Many policies have a coinsurance clause. For example, if you have $1 million worth of property with an 80 percent coinsurance, that policy requires you have at least $800,000 in insurance. If you’re not insured to that percentage, your claim is reduced proportionally.
Another mistake may be not insuring for replacement cost, but actual cash value. So, if you bought something 10 years ago with an eight-year useful life, you may get next to nothing in actual cash value. Replacement cost allows you to replace it with like kind and quality, even if that’s more than what you originally paid. For example, a five-year-old specialty lighting fixture might be replaced with a newer model, costing more than the originally damaged, obsolete and no longer manufactured fixture.
These details are why having the right broker helping you take care of your property exposures will save you money in the long run. ●
Insights Business Insurance is brought to you by Momentous Insurance Brokerage, Inc.