Business 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.

Calculating Deductibles

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.