Insurance for Your Business: Property Insurance
May 2005
The basics
Although it may seem overwhelming, smaller firms can limit their initial insurance research to three basic types of coverage: property, general liability, and workers compensation insurance. This month we will examine the realm of property insurance.
Property insurance protects your business against physical damage to, or loss of, your assets. Broadly defined, assets are the building where your business operates and the property housed there. Examples are:
Buildings and other structures
Any outdoor property such as signs or fences
Mobile property such as construction equipment or automobiles
Machinery
Furniture, equipment, and supplier
Inventory
Leased equipment
Computers and other data processing equipment
Records, valuable papers, books, and documents
Money and securities
Intangible property such as trademarks and logos
Property insurance may also cover the types of events that may lead to a loss. Events that do damage are known as "causes of loss," and include weather-related events such as lightning strikes or hail, and human causes like robbery or vehicular accidents.
There are generally two classes of policies available. A named-cause policy covers losses resulting from only those perils the policy names, while an all-risk policy protects the holder from all perils except those specifically excluded in the policy.
An all-risk policy typically has a somewhat higher premium, but most small business are better off with this kind of policy, which allows you to pick and choose additional coverage for additional perils if necessary (like flood insurance in low lying areas). These are often referred to as "riders."
When considering property insurance, it is important to know minimum coverage limits that may be contractually imposed by your bank or customers. For example, if your bank or other commercial lender has given you a loan on the piece of property that you're about to insure, you must usually maintain a certain level of insurance according to the loan agreement. If you don't, the lender may have the right to foreclose or to purchase its own insurance on the property and charge you the premium. Similar requirements may be required for inventory, accounts receivable or other physical assets.
This makes it critical for a business to periodically review its level of coverage and make appropriate adjustments. For example, a distribution business that has a highly seasonal cycle, perhaps around the holidays. This kind of business might double or triple inventory levels in preparation for the holiday rush and not be covered under a policy limit. By the same token, they may want to adjust the coverage down during slow times so as not to pay excess premiums.
Asset and property values can be insured in two 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.
In addition to this coverage, you can receive coverage -- at extra cost -- for business income lost as a result of a business's property loss. This is a key component of property insurance that should not be overlooked. It is one thing to cover the assets of your business but an entirely different matter to insure against the lost income those assets produce. If you have a fire at your corporate headquarters where all records, systems and logistics are located, you would be able to replace the physical assets but also receive compensation for the lost business income during the time it takes you to re-establish your headquarters' operations. In other words, a loss event that negatively impacts your ability to conduct business in other parts of the company should also be insured under your property coverage. Lost business income insurance should be part of the standard portfolio of coverage for small businesses.
The right level of property insurance can be the difference between recovering from a disaster and going under because of it. Just like you would for your personal property, evaluate your company's assets and what it would take to get your company back on its feet. Periodically review your insurance policy to make sure it's giving you the coverage you need as your company changes. Protecting your company's assets adequately will make recovery a much easier process.
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