Property Coverage 101 - Do You Know What you are Buying?
Mark Oliver
Cooper Gay Risk Services
First of all, I would like to thank everyone for inviting me to the Florida Insurance Trust's Educational Retreat. It was a real pleasure to be involved and I am looking forward to future events and getting to know the members better. We had many topics to discuss regarding the coverage issues and did not get through them all and so we decided to talk a little more on these here.
Please remember it’s important to have a disaster plan in place to prepare for the worst. You no doubt have planned where you would continue your operations, have a list of back up suppliers essential for operations and copies of important records and papers safe and secure. Insurance should be considered as part of your plan as disaster can strike at the worst possible time and is therefore very important. As such, we will discuss some topics and coverages you should think about buying in future.
The first thing to consider would be the valuation. It is so important to have an accurate valuation from a proper surveyor. The valuation should not be a real estate appraisal or one from the property tax surveyors. Remember it should accurately reflect how much it would cost to rebuild and replace your building and contents in the event of a loss. Remember if there is a disaster such as a hurricane, there will be little opportunity to shop around as contractors will be very busy and hard to find so there will be little opportunity to search for the best price or rebuild on a budget.
Once you have your valuation the next step is to decide on Actual Cash Value (ACV) versus Replacement Cost Value (RCV). RCV is simply what it says - the cost to replace the damaged property as new. ACV is the replacement cost less depreciation. ACV will carry a cheaper premium than RCV but with ACV, you could be out of pocket in the event of a loss without sufficient funds to rebuild or replace your property after the depreciation is considered. Also think carefully about what loss limit and deductible you would want and how much risk you want to assume. It’s ultimately your choice but be mindful if the worst happens would you be able to get your business up and running again without seriously damaging it financially.
If Insurers feel that your property is undervalued, they could impose Coinsurance. This is a penalty that would apply in the event of a loss. Here are examples of how this works as per ISO in their policy form.
They determine the most they will pay using the following steps:
- Multiply the value of Covered Property at the time of loss by the Coinsurance percentage
- Divide the Limit of Insurance of the property by the figure determined in Step (1);
- Multiply the total amount of loss, before the application of any deductible, by the figure determined in Step (2); and
- Subtract the deductible from the figure determined in Step (3).
We will pay the amount determined in Step (4) or the limit of insurance, whichever is less. For the remainder, you will either have to rely on other insurance or absorb the loss yourself.
Co-Insurance Penalties Examples See Example 1, 2, & 3
For those of you that work in older buildings that do not meet current Florida building codes, Ordinance and Law cover is a very important coverage. The state could, after a loss, insist on your building be demolished and rebuilt to the latest building codes. The cover is divided into three parts:
A - this is covering the undamaged portion of the building which must be demolished to conform with the latest ordinances.
B - this covers the cost of the demolition for the undamaged portions of the building
C -this covers the increased cost of construction incurred to rebuild so that it meets the specifications of the current building regulations.
Make sure you discuss your property appraisal with your agent about the limits on these three coverages to ensure you have sufficient limits on each in the event of a claim.
Boiler and Machinery (B&M) insurance covers the insurance of machines and includes damage not only for the machine but for the surrounding property, if, for example, an explosion occurs or a fire follows the breakdown. You can also opt to have business interruption included. A covered loss will be sudden and accidental in nature, wear and tear is excluded. Examples of equipment this insurance will cover are boilers, pressure vessels, generators, air conditioning,and refrigeration units. You will find that some property policies include B&M either in its entirety or with a sublimit. Others specifically exclude B&M and it is necessary to purchase separately. If purchased separately, please ensure that there is a Joint Loss Agreement included in your property and B&M policy as there are some losses where it’s unclear initially which policy should respond. This clause means that the property and B&M policies will pay you immediately and then subsequently they decide which is responsible.
Earth Movement is a broad category that includes earthquakes, volcanic eruptions, landslides, sinkholes, mudflows and shock waves. It can be included in property polices or purchased separately.
Inland Marine coverage is available for anything that is mobile that does not have a license plate. This cover could be used on golf buggies, large driver operated lawn mowers, fork lifts, construction equipment and the like. Fine arts cover is available to cover art, sculptures, antiques and other collectables. Fine Art and Inland Marine covers can be covered by sub-limits on a property policy but also are available on a standalone basis that would provide more cover on a tailor made basis, that could provide larger and more adequate and appropriate limits.
Valuable Papers and Records covers printed records and the cost to reconstruct them if they are damaged or destroyed by a disaster. Accounts receivable is coverage afforded when business records are lost insured peril cannot collect monies due. It not only covers the actually monetary amount but also for the cost of recreating the records and any other fees associated with it.
Transit Coverage while in transit over land from one location to another and typically provide coverage only at locations identified in the policy. Usually is sub-limited so make sure you have adequate cover.
Property of Others coverage provides protection for property that is on loan and in your care, custody and control. Again, this will most likely be sub-limited so please make sure you have sufficient limits.
Statistically, 40% of small businesses that close following a disaster never reopen. This is often because they do not have adequate insurance cover. There are some very basic property policies available and while they may appear to save you money when paying the premium, they could cost you dearly when you have a significant claim. Make sure you have an accurate appraisal and discuss your business thoroughly with your agent to make sure that you have the necessary coverages in place to protect your business.