PROPERTY AND LIABILITY INSURANCE
Insurance is a form of risk management. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage. In layman's words, insurance is the amount of money paid by an insured person or business to an insurer, so that, if an uncertain calamity happens in the future, the insurer will pay the insured to negate the effects of the calamity. The greater the risk is, the higher the premium is. In other words, a business owner in Kansas City, Kansas would pay almost nothing for a hurricane policy compared to what a similar business in Tallahassee, Florida might pay.
Calculating how much to charge
Insurance companies use actuarial science to determine the risk they are willing to assume. This is the study of statistics and history based on geographical area as well as who and what is being insured. Based on this information, they can predict the likelihood of future claims. Needless to say, actuarial science is used to create more winners to offset the losers so they can be profitable.
A Business Owner's insurance Policy (BOP) is for small to mid-sized business owners. BOPs combine some of the basic coverages needed by a typical small business into a standard package at a premium that is generally less than would be required to purchase these particular coverages separately. Business owner's policies basically consist of property coverage, liability coverage and some additional types of coverage that most businesses require, like business interruption insurance (covered in detail in last month's newsletter). Optional coverage can also be added to meet specific needs of the business.
The criteria for BOP eligibility include the size of the premises, the required limits of liability, the type of business and the extent of offsite activity. Premiums for BOP policies are based on similar factors, including business location, financial stability, building construction, security features and fire hazards.
Property insurance protects your buildings and equipment, furniture and fixtures. Some policies include equipment breakdown. Basic property insurance will generally cover your business for losses in the event of a fire or lightning strike and will pay the cost of removing property to protect it from further loss. Building coverage for building owners includes additions and extensions, permanent fixtures, materials for construction, alteration or repair of the building, and needed equipment. Property insurance does not cover income lost during renovation or repair.
Contents Insurance covers any or all business personal property such as furniture, inventory, fixtures, supplies or equipment and personal property of others (a suit being altered, for example). Books of record or computer hard drives and backup disc stored on the premises are covered at the cost of the book, drive or disc, not for the information they contain. In life, a regular back-up stored off-site has a monumental value.
Incidental Property Coverage
Incidental Property Coverage may include: newly acquired property, property stored off-premises (such as last season's merchandise that you are carrying over to next year), trees and shrubs, personal effects of others, etc. Check with your insurance agent to understand the exact terms of your coverage. Do not hesitate to ask until you understand for sure what is and what is not covered.
Property in Transit
Insurance companies prefer to insure things that stay in one place and do not change very much. But you also may need coverage for property in transit and, if asked, they will provide that, too.
Generally, items not covered include claims due to enforcement of laws or regulations concerning construction repair or demolition of buildings, loss caused by failure of power, heating or cooling equipment, earthquakes, flood or tidal water, or subsurface water except as these may cause fire or explosion and then only damage inflicted by the fire or explosion is covered. Additional policies may be purchased for this risk. The only way to know with certainty what coverage you have and what the limits are, is to ask your insurance broker.
A word of caution: New construction may alter the flow of runoff water over several blocks of land. Check with your insurance broker to verify what disasters your policy covers.
Coverage: Replacement or cash value
Policies are written with a specific value in mind should there be a total loss. The value is either at replacement value or actual cash value. Simply stated, replacement value means the cost to replace the property on the same premises with other property of comparable material and quality used for the same purpose. Actual cash value represents the cost to replace with new property of like kind and quality, less depreciation. The insurance company determines the depreciation based on a combination of objective criteria (using a formula that takes into account the category and age of the property) and subjective assessment (the insurance adjuster's visual observations of the property or a photograph of it).
Consider now how important a picture of your store all decked out could be if you needed proof for a claim. Do you have pictures of your store, the equipment used and inventory stored off-site? Do you update your photos and images regularly?
Finally, consider one of your most valuable assets, data. Most insurance policies cover tangible property. If a web server is stolen or destroyed in a fire, the insurance company will pay to replace it, but not the information stored on that server. Data is not tangible, but loss can be catastrophic to a business. For those who may be interested, types of data coverage include legal liability to others, web content liability, professional liability, network security property loss, business interruption for your on-line business, and crisis communication. Let me remind you, if this is too expensive, a regular back-up of all computer systems, stored off-site can be invaluable.
The most valuable part of liability insurance is the insurance company's agreement to pay for a lawyer to defend claims, even if frivolous. Pay attention to whether defense costs are "inside the limits" (this is bad) or "outside the limits" (this means that the policy pays the limit of insurance plus the costs of defense in addition to the insurance limit).
This is the final article in our series on insurance. I hope this series of articles serves as encouragement to contact your insurance agent and go through each type of coverage for your store. Take the time to ask questions and understand the policy. Take notes and attach your personal notes to the policy. Don't get a surprise of being under-insured or worse, uninsured, when disaster strikes.