Property Insurance Coverage

Property insurance protects the contents of your business against fire, theft and other perils. There are many different types of property insurance and levels of coverage available. Property insurance can be tailored to fit your needs since no two businesses are the same.

It is important to determine the property you need to insure for the continuation of your business and the level of insurance you need to replace or rebuild. To determine your property insurance needs the best thing to do is to take a complete inventory of all your business property.

Property to Insure
Types of Property Insurance Policies
Buying Enough Coverage
Agreed Amount
Coinsurance Clause

Property to Insure

Types of property a business needs to insure include:

• Buildings and other structures, leased or owned
• Furniture, equipment, and supplies
• Leased equipment
• Inventory
• Money and securities
• Records of accounts receivable
• Improvements and betterments you made to the premises
• Machinery
• Boilers
• Data processing equipment and media, including computers
• Valuable papers, books, and documents
• Mobile property, such as construction equipment
• Satellite dishes
• Signs, fences, and other outdoor property not attached to a building
• Intangible property (goodwill, trademarks, etc.)

Types of Property Insurance Policies

All basic property insurance policies generally cover losses caused by fire or lightning and the cost of removing property to protect it from further damage (i.e., removing inventory or equipment from a damaged building so it won't be stolen).

If you want to buy more than the basic coverage you can purchase a standard policy that provides coverage for extended perils including windstorm, hail, explosion, riot, riot attending a strike, smoke, civil commotion, aircraft and vehicles that damage your property. Coverage for vandalism and malicious mischief also may be added.

If you want even broader coverage you should consider adding optional perils to a standard policy. Optional perils include damage to the exterior of a building from falling objects; damage from weight of snow, ice, or sleet; building collapse; water damage from leaking plumbing, heating, or air conditioning pipes or appliances (but not damage from floods, and other natural sources of water, and sprinkler leakage); and glass breakage. Sprinkler leakage and some other perils that are optional in a standard policy may automatically be covered in package policies.

A standard small business policy will usually cover losses from windstorm, hail, explosion, riot and civil commotion, aircraft, and damage caused by aircraft, automobiles or vandalism. A special form policy covers loss by any perils not specifically excluded in the policy. What makes the two policies different is the perils each covers and the options each offers.

Buying Enough Coverage

Before buying property insurance, you need to understand the difference between "replacement cost" and "actual cash value." Most property insurance policies contain replacement cost coverage on the building and actual cash value coverage on business property. Property insurance typically covers the business's building(s) and contents.

Replacement cost is the amount it would take to replace or rebuild your building or repair damages with materials of similar kind and quality, without deducting for depreciation. Depreciation is the decrease in building or property value since the time it was built or purchased because of age or wear and tear. In order to qualify for replacement cost coverage, the dwelling is required to be insured to at least 80% of the replacement cost.

The amount of replacement cost coverage available is limited to the amount of insurance you choose to buy. The coverage amount is stated on the declarations page of your policy. If you purchase an amount less than 80% of replacement cost of your home, your insurance company will not be obligated to pay the total cost of loss to your home even if there is a small loss. The "loss settlement" section of your policy explains how the settlement is calculated.

Actual cash value is the value of your property when it is damaged or destroyed. This is usually figured out by taking the replacement cost and subtracting depreciation. Contents coverage (for such items as furniture, television sets, and appliances) is usually on an actual cash value basis. For example if your office furniture is 10 years old and is destroyed in a fire, that costs $500 to replace may have a reasonable "life" of 20 years. If it is destroyed after 10 years, its actual cash value will be much less than $500, probably about $250.

Most polices pay for losses to your contents on an actual cash value basis, but a better option is the replacement cost coverage. Although the cost is higher, in most cases, the extra protection may be worth it. Replacement cost coverage is available for an additional premium.

Agreed Amount

Art objects, antiques and other unique items are usually insured at an amount agreed upon when the policy is being written. An appraiser values the goods to be insured and the business owner and the insurer agree upon an amount that the insurer will pay if the goods are destroyed due to a covered peril.

Check your policy to find out what type of coverage you have. If you prefer replacement cost coverage and do not already have it, this coverage can be added to your policy. Inflation-guard coverage that automatically increases your insurance amount a certain percentage provides protection against rising costs. Your agent can advise you of the costs involved.

Your insurance agent should fully review the types of business property you own and use to discover what kinds of property insurance you need. Your insurance agent can help you determine a satisfactory limit coverage for your specific business.

Coinsurance Clause

Most property insurance policies (but generally not package policies) include a coinsurance clause. Coinsurance requires you to share in the cost of covered services up to a reasonable percentage of the actual cash value of the property, in order to receive full coverage of losses. If you fail to insure your property to the required amount of property insurance the insurance company will pay less than 100% of any covered loss.

A typical coinsurance arrangement is 80%. This means that if your insurance policy contains an 80 percent coinsurance clause used to insure a building with an insurable value of $100,000 you are required to have insurance for $80,000 at the time of loss.