The holidays are fast approaching and the last thing on your mind is business insurance. We all know that we need to insure our buildings and property from loss, and we buy an annual policy to do that, but are we covered?
The answer is maybe! Most property policies have a coinsurance clause. The coinsurance clause allows you to insure your buildings and contents at 80 percent, 90 percent, or 100 percent of replacement cost of the property. If you elect 80 percent coinsurance, you are self insuring 20 percent of your property in the event of a total loss. The insurance companies require that policy holders insure their property to value. So what happens if you don’t comply? Nothing, until you have a loss and you want the policy to respond. Let’s take a look at a couple of examples.
An insured has a $100,000 loss to their building. The coinsurance clause purchased was 80 percent and the amount of insurance carried on the building was $500,000. At the time of loss it was determined that it would cost $600,000 to completely replace the building. The insured in this case was complying with the insurance carrier as 80 percent of $600,000 is $480,000, which is less than the $500,000 they are carrying. In this case the $100,000 loss will be covered in full less the deductible.
An insured has a $100,000 loss to their building. The coinsurance purchased was 100 percent and the amount of insurance carried on the building was $500,000. At the time of loss it was determined that it would cost $600,000 to replace the building. The insured in this case was not complying with the insurance carrier. They were insuring the building at $500,000 and should have been carrying $600,000. They were insured at 83 percent of value ($500,000/$600,000). The 83 percent will now be multiplied by their loss of $100,000. The insurance carrier in this case will pay $83,000, less the deductible, to repair the building. The insured will be responsible for $17,000, plus the deductible.
The cost of being insured to value is usually very minimal, so why do insured’s not do it? There are a variety of reasons, from not knowing the true replacement cost of their property, to thinking that they will not have a total loss or not understanding that coinsurance will apply to a partial loss. They also may not understand that they can buy 80 percent coinsurance or they are trying to save money by carrying lower limits of insurance. Insured’s should review their coinsurance options and replacement cost values annually with their broker. Don’t let an insurable loss put your business out of business!
Receive a free insurance quote through WHFA’s new insurance broker, James G. Parker, and make sure your business is fully covered. Call (800) 422-3778 today.