Helping you and your customers understand the confusing world of insurance!
Insurance companies seem to have their own language. Knowing what coverage to buy and how much of it you need is a mystery to most business owners. Insurance is not as confusing as most insurance companies make it out to be, and I’m here to help you understand it! Here is the simplified version of what coverages are typically offered and why you might need them.
Business owners need to protect their property. If you own the building that your business occupies, property insurance provides a wide range of coverage for the building, furniture, fixtures, machinery and equipment, stock, and all other business personal property owned by you and used in your business. Losses from fire, severe weather (including windstorms and lightening), theft and vandalism, water damage, explosion, along with many other perils, are typically covered under a commercial property insurance policy.
If you are a business owner that does not own the building you occupy, a commercial property policy will also provide you coverage for your contents that includes furniture, fixtures, machinery and equipment and stock. You can also purchase insurance for the improvements that you have made inside the building that you won’t be able to take with you when you leave the property but still want to be covered if a loss occurs.
Insurance policies offer you the option of insuring your building and/or contents for one of two options: Actual Cash Value or Replacement Cost.
So which one do you select? Is there a better option?
Actual Cash Value is what is used to determine how much the insurance company will pay you for the value of the loss or damaged property. It is the value of your building or contents based on the cost to replace or repair them, minus depreciation. Actual Cash Value is typically the cost that the property could be sold for, which is always less than what it would cost to replace it.
Replacement Cost is the actual cost to replace an item or structure at its pre-loss condition, without any deduction for depreciation.
You still may be wondering which one is better. Well that depends on your individual business plan and how much you want to spend on insurance. Regardless of the valuation option that you select (Actual Cash Value or Replacement Cost), you will never get paid more than the limit of insurance you purchase on your policy. It will cost more for you to insure your property at Replacement Cost because you will need to purchase insurance for the value that it will cost to actually replace the property. There are cost estimators that are specifically made available to insurance companies/agents that help determine the “right” amount of insurance to buy for Replacement Cost.
If you choose the Actual Cash Value option, you need to purchase enough insurance for the cost to repair or replace the damaged property after the deduction for depreciation. This amount of coverage is less than the Replacement Cost option, so the insurance premium will be less. But remember, if there is a loss, you will have to pay the difference out of pocket for the cost to replace or repair the property at today’s prices (since the insurance company will pay you a reduced amount due to the depreciation deduction).
Are you going to rebuild after a loss? Another important factor to consider in determining how you want to insure your property is if you are going to rebuild or replace the damaged property after a loss. Replacement Cost policies will only pay the Replacement Cost if you indeed replace or rebuild after a loss. If you decide you don’t wish to continue your business operation, then the policy will pay you the Actual Cash Value. It will not pay out Replacement Cost if no replacement is being made!
What about flood? Most commercial property policies exclude coverage for flood. So if you live in an area where flooding is prevalent, you will need to purchase a separate flood policy. You can purchase flood insurance from the National Flood Insurance Program that is managed by the Federal Insurance and Mitigation Administration (FIMA). Some individual insurance companies offer flood insurance as well, but it is best to discuss your options with your insurance agent.
Equipment breakdown is another “typical” insurance coverage that business owners should purchase. Many commercial property policies automatically include this coverage. Every business owner has some sort of equipment they need to run their operation, no matter how small the business is. Equipment breakdown provides coverage for air conditioning units, boilers, communication systems, computers, electrical equipment, freezers, P.O.S. registers, security systems, walk-in refrigerators, and almost anything electrical. This coverage protects the business against any equipment repairs or replacement expenses, labor costs, and other expenses to get back in business as a result of a covered loss. State mandated boiler inspections are also included with the purchase of this coverage… Think of it as an added benefit!
Although there are many more property coverages that business owners can purchase, the ones listed above are the “typical” ones you’ll need if you are a business owner.
If you found this article helpful then be sure to stay tuned for future Insurance Made Simplearticles:
Part II – Business Income Insurance – ah the mystery of it all!
Part III – Comprehensive General Liability Coverage – how to protect the company’s assets
Part IV – Liquor Liability – who needs and why the CGL policy is not providing coverage!
Sandra Haley is the Senior Vice President of Underwriting and Marketing at Hospitality Insurance Group.
Please be advised that the opinions expressed are the views of the author alone and should not be attributed to any other individual or entity and shall not constitute a legal opinion.