Business Property Insurance
About Property Insurance
What Is Property Insurance?
Let’s say the worst happens: a fire breaks out and you lose your inventory; a hurricane sends a tree smashing down onto your office; your business is burglarized. Your ability to recover from any one of these disasters is heavily dependent on your property insurance.
Property insurance protects your business against physical damage to or loss of your assets. Assets, broadly defined, include the area in which your business operates and the property housed there.
In the case of catastrophes like fire, theft, or vandalism, property insurance helps cover your costs–whether for repairs to damaged property or replacing what you’ve lost.
What Does It Cover?
Property insurance coverage varies from policy to policy in two main ways: the property actually insured, and the events leading to the loss.
In terms of property, some policies cover basic equipment (building structure, furniture, inventory, equipment and supplies); others insure hard-to-replace records and papers or money and securities from damage or loss.
Events that do damage are known as perils or causes of loss, and include weather-related events such as lightning strikes or human causes such as vandalism or vehicular accidents.
Two types of policies are available to cover perils: named perils policies, which covers losses resulting from only those perils the policy names, and all-risk policies (aka special form coverage), which offers coverage for all perils except those specifically named. Most companies are better off with all-risk policies, and usually can pick and choose coverage for additional perils if necessary.
How Are You Reimbursed?
Property is valued in two main ways. If you are covered for the actual cost of replacing your property, this is known as a replacement cost basis. The alternative, actual cash value (ACV) reimbursement, is based on the replacement cost minus physical depreciation of the lost or damaged property.
The premiums for ACV policies tend to be lower, as they usually pay out less, but the reimbursement could be inadequate if you actually need to replace items. Therefore, most brokers will tell you that you are better off with replacement cost insurance, unless your industry’s used equipment is easily obtained at its physically depreciated value.
How Premiums Are Set
What are the most frequent perils your business may face? The answer to this question will affect your premiums. Insurers make it their job to understand the statistical frequency of major risks such as fire and theft, and policies can be easily adjusted to take into account greater amounts of protection.
The Insurance Services Office (ISO) provides insurers with basic premiums incorporating a number of factors to determine the basic risk of your property. The primary factors in setting property insurance premiums include the type of building structure, the presence or absence of protective safety measures, and the proximity of your property to other high-risk areas.
This basic rate is then further adjusted at the discretion of the insurer, who credits or debits based on claims history or specific loss control measures. In states where rates cannot be adjusted, dividends are commonly used as a way to reduce premiums. Please note, however, that dividends are not guaranteed, and should not be counted upon until you have the check in your hand.
Looking for more credits? If you haven’t already done so, install burglar alarms, fire extinguishers, smoke alarms, fire doors and sprinkler systems. Or even simple changes, such as keeping duplicate records offsite, can result in premium savings. But before beginning any major work, you should compare the costs involved with potential savings.
Just as with auto insurance, deductibles are the amount of money the insured needs to pay before receiving any benefits from a claim. Higher deductibles equal lower premiums–although the savings does taper off at some point.
Policies calculate deductibles on a per-claim basis or an aggregate basis. Out-of-pocket costs for per-claim deductibles tend to be lower, so this works well for businesses expecting relatively few claims.
But firms that file many small claims will fare better with the aggregate deductible, which places a cap on overall costs and allows you to calculate the maximum cost to your company ahead of time.
Insurance companies commonly offer discounts to firms agreeing to insure high percentages of their property’s value (typically 80-100%).
However, these discounts come with their own set of requirements. If a required percentage of coverage is not maintained over time, you may be surprised when you make a claim and are slapped with a coinsurance penalty.
To avoid penalties like this, make sure that the property’s value is checked on an ongoing basis. Also, you may want to insure property at a percentage that is greater than the minimum specified.
There is also an option that avoids the threat of a coinsurance penalty altogether. Known as an agreed amount clause, it involves the insured and the insurer agreeing to a certain value for the covered property. Should you decide to pursue this option, make sure this clause is active as long as your property coverage is in force.
Terms of Reimbursement
It’s worth investigating is the terms of reimbursement of any policy. A company may purchase a $1 million property policy, for example, only to discover when it comes time to file a claim that only a limited portion of that coverage may be applied to a given category of property.
To avoid such snags, it is very important to understand how your company’s assets match up against any sublimits specified in the policy. It may be necessary, in some cases, to purchase additional coverage to protect the full value of particular assets.
How long a grace period are you granted in adjusting your policy to reflect the value of newly-purchased assets? Some policies provide this for new purchases, allowing property claims to be greater than the original written value of the policy for a limited time.
Check the renewal terms. Policies can be written so there is an automatic yearly increase in coverage provided. While this may be convenient for companies that have predictable growth, those with more variable growth patterns may want to adjust policy coverage as it is needed.
There are many other types of insurance available to cover losses related to property. Some of the most popular forms of coverage include the following:
- Business interruption insurance provides compensation for the lost income that results when a business cannot continue to function due to a loss related to an insured peril. This type of insurance will make payments for ongoing expenses such as salaries and rent
- Extra expense insurance provides funds to cover the costs of operating a business in a temporary location while the property is being fixed. This is usually most relevant to businesses that must remain open no matter how great the extent of damages.
- Boiler and machinery coverage insures mechanical and electrical systems when they break down. This coverage include the damage actually suffered by the equipment and extends to damage it may have inflicted to other property. Some business interruption insurance is often included in this coverage.
- Crime insurance covers the cost of losses arising from theft.
- Cargo insurance covers goods when they are being conveyed between destinations. Although it may be included in a basic property policy or in the shipper’s insurance, the limits may not be high enough to cover the full value of the property being moved if it were to be damaged.