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Steve Torres
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One of the largest components of your financial investment is the building in which your business is housed and its contents. A general property insurance policy will provide coverage for buildings, contents, equipment, and other real and personal property owned by your business.

Two types of property insurance policies are “named peril” and “all risk.” A named peril policy provides protection for specific events such as fire, windstorm, hail, vandalism, or sprinkler leakage. The policy only covers those events named in the policy and is usually less expensive because it provides less coverage than an all risk policy.

An all risk policy provides protection for any loss by perils not specifically excluded in the policy. The term all risk does not mean that all losses will be covered. It only means that the losses that will not be covered are those that are specifically listed as exclusions in the policy.

Property insurance can either be purchased on a “replacement cost basis or an “actual cash value” basis.  Whether your business is insured for replacement cost or actual cash value, it is important to keep track of the value of your property. For your buildings, inflation tends to increase the replacement cost of your property, while the actual cash value may change over time, decreasing as the building depreciates, or increasing if the cost to rebuild increases faster than the depreciation.

The value of your property can be determined by using the original construction costs or regional construction costs guidelines using guides available from insurers, builders or consultants. For the most accurate estimates or for unusual buildings or construction methods you may want to hire a professional appraiser. (See the discussion on selecting the amount of coverage that follows.)

The value of personal property owned by the business can also vary over time not only from the same causes as the building, but from changes in the amount and nature of the property as well. If the value of your personal property varies greatly from time to time, or is shifted between two or more locations, consider a reporting form policy or a seasonal endorsement.

If your business property includes valuable items such as fine art, antiques, accounts receivable, jewelry, valuable papers and records, or other kinds of property excluded or limited by your general property policy, you may need to buy an endorsement or a separate policy to increase your protection by specifically covering those items.

You want to check with your agent or insurer for the extent of coverage on your computer system. Most basic policies cover only the value of the computer and the cost of blank discs, drives, or tapes.  They do not cover the cost of reproducing the lost information.    A special policy or endorsement may provide coverage for such losses.

Although individual situations vary, most business policies require that property be insured for at least 80 percent of its value. This percentage, called “ coinsurance,” reflects the minimum amount of insurance you must have before most property insurance policies will fully reimburse you for partial losses. Remember, most losses are partial losses. The following example shows how a “coinsurance penalty” would work if you fail to insure your property for the amount required by your policy.

As an example of what not to do: Let’s say you buy replacement cost insurance for a building you think will cost $100,000 to replace. You insure the building for $80,000 thinking you have satisfied an 80 percent coinsurance requirement. A fire loss causes damage to your building that will cost $40,000 to repair. Your building is subsequently determined to have a replacement cost of $120,000. Since the policy contained an 80 percent coinsurance clause, the building should been insured for $96,000 (80 percent of $120,000).
To determine how much the insurance company will pay, divide the amount of insurance you purchased ($80,000) by the amount of insurance you should have purchased ($96,000). This equals 83.33 percent. Multiplying this percentage times the amount of the loss determines the amount of payment (minus any deductible) .8333 x $40,000 = $33,332.

Even though the total amount of the loss was $40,000, the insurer will only pay $33,332 less the deductible, if any. The insurer would have paid the full $40,000 (less deductible) if the building had been insured for 80 percent of its actual replacement cost.

Coinsurance usually applies to business personal property also, and may apply to builders’ risk insurance, business interruption insurance and crime insurance. It will affect the amount paid in the event of a loss in the same way as the illustration of the building loss.

Check with your agent periodically to make sure your policy provides adequate coverage. You may be able to add an endorsement to the policy that automatically increases policy limits at pre-selected times. Even with this endorsement, check on the values and coverage frequently since inflation can take some odd turns and leave you under or over insured. Of course, you need to notify your agent whenever new property or operations are added.

Depending on the size of your business and the nature of your business operations, there are many related coverages which you may wish to incorporate into your total insurance package. Following are brief descriptions of some of these coverages.

Builders’ Risk coverage. This insurance covers buildings in the course of construction. It can be written on a “completed value” form, which provides coverage for the full value of the finished building, or on a “reporting” form, which requires the insured to report the value of the building on a monthly basis. Other forms are also available such as “contractor’s automatic builders’ risk” form which provides automatic protection for thirty days on new construction projects. Most builders’ risk policies do not cover tools or building materials before the materials become a permanent part of the building.

You may be able to purchase coverage separately or as an endorsement to the policy.
  • Business Interruption insurance. Coverage is provided for loss of earnings of the business as a result of damage to or destruction of property. This coverage generally provides reimbursement for necessary salaries, taxes, rents, and other expenses that continue while the business is partly or totally inactive, plus net profits which would have been earned during the period of interruption, up to the limits of the policy.
  • Extra Expense insurance. This coverage is similar to business interruption, but covers the additional expense of keeping the business going on as nearly the same basis as possible after a covered loss to buildings or business personal property. The additional expenses must be actually incurred to be covered.
  • Rents or Rental Value coverage. Usually an endorsement to the building or personal property policy, it covers the lost rent or rental value while the building cannot be occupied due to a covered loss.
  • Outdoor Signs coverage. These signs are not usually covered under a basic policy, but may be added by endorsement or by purchasing a separate policy.
  • Radio and TV Towers/Antennas coverage. Commercially used towers and antennas, such as those used to keep in contact with outside employees or to receive commercial transmissions, are usually not covered by the basic property policy. A separate policy is often needed to provide coverage.
  • Inland Marine insurance. This insurance is written primarily to cover property in transit, as well as property in the custody of bailees, such as dry cleaners, processors, laundries, etc. This type of insurance may also be used to cover such things as sales samples, contractors’ equipment, patterns, exhibitions, boats designed for inland waters, and live animals.
  • Ocean Marine insurance. Special policies cover ocean­going vessels, their cargo, and liability for operation of the vessel.
  • Glass coverage. This insurance may be purchased to provide all risk coverage for breakage of glass that is a part of buildings and display cases. Insureds with large amounts of plate glass may want to buy this coverage to provide protection for damage otherwise excluded under most commercial property policies.
  • Commercial Crime coverage. Insurance may be purchased to cover your business personal property in the event of burglary or robbery, or to protect against accepting counterfeit currency. Most crime policies do not cover money and securities unless the policy is specifically designed for that purpose, such as a money and securities policy, or the policy has an endorsement extending the coverage.
  • Boiler and Machinery insurance. This coverage provides protection for damages caused by, and to, certain pressure, mechanical, and electrical equipment which keeps the business in operation, and basically insures against the three major exclusions found in most property insurance policies: (1) boiler explosion; (2) mechanical breakdown; and (3) electrical arcing. Almost any type of equipment that controls, transmits, or uses high-pressure steam, mechanical, or electrical power can be insured under a boiler and machinery policy.
  • Flood insurance. This insurance covers losses to buildings and their contents due to flooding caused by rising water. Generally, flood insurance is not sold by private insurance companies, and coverage for this peril is not covered under most property insurance policies. The federal government sells insurance for direct flood and flood-related damage including mudslide and erosion under the National Flood Insurance Program (NFIP). Some insurance companies also offer policies through the NFIP in their own names. For more information, contact your agent or call the National Flood Insurance Program at 1-800-427-4661. This coverage may also be available under motor truck cargo insurance policies, all risk transportation endorsements, and bailees’ customers’ policies.
  • Earthquake insurance. Coverage for earthquakes is usually available through an earthquake extension endorsement that, for an additional premium, extends coverage to earthquakes and volcanic eruption. This is generally written with a deductible that is a percentage of the value of the property that is damaged. It is important to discuss this coverage with your agent.
  • Building Ordinance coverage. This is coverage against additional cost of repairs to the damaged property because of building codes or ordinances. The cost of bringing damaged buildings up to current building code standards is not covered in most basic policies, since even replacement cost policies only cover replacement or repairs with “like kind and quality.” Further, some building codes may require that a partially damaged building be torn down rather than repaired. Without special coverage, this additional cost would be excluded from the policies.
  • Sprinkler Leakage coverage. This coverage protects against loss from the accidental leakage of a building sprinkler (fire suppression) system.
  • Click the link to learn more about Liability protection.