The right coverage Featured

8:00pm EDT July 26, 2007

Business owners often have much of their life and their savings invested into the properties they own, making it crucial to have the proper insurance coverage. A disaster that results in a partial or total loss of a property can result in major debt or bankruptcy for an owner.

While there are numerous ways to insure real property, all business owners can tailor their coverage to their own specific needs. The key to ensuring you have the proper coverage is to determine the value of a structure, says John Dorris with Westland Insurance Brokers.

Smart Business spoke with Dorris about different types of coverage and how business owners can find the type that works for their needs.

What is the first step business owners should take when insuring real property?

A business owner should be insured to value. This is the first step in ensuring you get indemnified to the full replacement cost of your structure.

Many insured’s don’t realize how much it costs to rebuild their property in case of a total loss. If a fire strikes your building, you may have to replace the entire physical structure. At times, this is more than the market value price of a structure, specifically on older buildings.

Can business owners receive full replacement cost?

Yes, and they should expect it. But business owners shouldn’t rely on insurance carriers to determine their building’s replacement costs. It is important for business owners to talk with their contractors, lenders, insurance broker and insurance company to get information on current day rebuild costs. Insurance brokers have access to many resources that assist in determining a property’s value.

What types of policy clauses should owners discuss with a broker?

Agreed value: Many policyholders like agreed value because it takes the guesswork out of what will be paid on a claim. Agreed value is an agreement made between the insurance company and policyholder that the limit of insurance listed on the policy is that buildings value, and that agreed upon value is what will be paid in the event of a total loss. Another advantage is that coinsurance is suspended.

Coinsurance: While some policyholders would like to avoid coinsurance, it is by no means a bad policy clause. Again, it depends on the needs of one’s company. Coinsurance is simply a policy clause that requires property to be insured at a specified percentage of its full value (usually 80 percent, 90 percent or 100 percent) in exchange for a pricing credit. However, if there’s a loss and the client has inadequate limits, the claim payout will only be a percentage of the total loss amount.

While these are just two examples of policy clauses to review, they show why it’s imperative to know your buildings value. When you do, you can make prudent decisions on how to insure it. Whether you chose an agreed value scenario or a scenario with coinsurance, you’ll feel comfortable your real property will be replaced without paying more than the deductible.

Is there a specific coverage that you would like business owners to contemplate?

Ordinance of law coverage: Ordinance of law is one of the most needed types of insurance coverage, but one of the most commonly overlooked. As your real property becomes older, building codes in your county are updated to reflect new standards for construction. In many instances, business owners don’t elect this coverage because they don’t think ordinance changes will affect them. As always, the problem comes after the loss.

Ordinance of law has three parts to it: demolition of undamaged portions of the building, increased cost of construction and debris removal after demolition. A structure may have been built in 1971 when the building code allowed for aluminum wiring, but in 1975 the building ordinance was upgraded to call for the same building to have copper wiring. If the policyholder has a fire loss that destroys half the building, he may be required to tear down the entire building and upgrade everything to current code. Since complying with this code requires a change in design and building materials, the additional costs for labor and materials will be substantial. Building owners who don’t purchase this coverage may find themselves paying hundreds of thousands of dollars to rebuild. So, for a minimal premium there is a substantial benefit when an insured purchases ordinance of law coverage.

Is proper coverage often overlooked?

It is not overlooked as much as neglected. Insurance buyers may not understand the importance of reviewing these limits on an annual basis. As we’ve seen in so many claims scenarios, business owners believe they’re insured properly only to find out after a loss that they’re underinsured. It is crucial to sit down with your insurance broker prior to renewal and review the current insurance program.

How can a business owner find the best insurance provider?

When looking for an insurance provider, business owners should choose an insurance carrier that focuses on their industry, tailors their policy forms to protect that industry, and offers risk management services to assist the policyholder in protecting their property as well as their business as a whole.

JOHN DORRIS is a commercial insurance broker with Westland Insurance Brokers. Reach him at (619) 641-3245 or