An introduction to property insurance
Insurance companies offer professional protection through a comprehensive series of insurance products that allows business owners to manage business risk and anticipate business uncertainty.
Property insurance insures a business against unexpected loss or damage to the business site and to its contents. Large losses to a business’s assets such as inventory, supplies, equipment, machinery, furniture, computers, money and securities, commercial vehicles, but also trademarks are covered by property insurance. Also, if the location of a business is rented or leased or moved to other physical locations, property insurance is carried by the terms of the lease or contract.
Typically, property insurance comes in the form of covering specific perils such as fire, flood and theft that result to large losses of money. This form of policy insures against losses from the single, identified peril.
However, property insurance comes also in a broad form that identifies a number of different types of perils and covers against losses from all acknowledged causes in the policy. Multiple-peril insurance policies cover fall of aircraft, volcanic eruption, damages to the building from falling trees, riots, strikes, civil commotions and malicious damages, glass and mirror breakage, food adulteration, short circuit of the building electric panel, third party liability for falling objects, employee confidence coverage for punishable acts, moving, restoring and reallocation expenses, owner and employee accidents and many others.
Property insurance is purchased based on several factors. One of them is the location that the business is established. For instance, a business established in Chicago will prefer insurance coverage for snow, ice or sleet damage. A business established in San Francisco will prefer an earthquake insurance policy.
Another factor is the business’s income and liability. Generally, property insurance policies are purchased through a Business Owner’s Policy (BOP), which offers property and liability insurance in a broad form property insurance policy. In some cases, BOPs include optional coverage such as business-interruption insurance and extra-expense insurance.
Business-interruption insurance provides coverage for taxes, debt payments, salaries, and loss of profit due to interruption of business. Extra-expense insurance applies for relocation costs after a covered damage has occurred. If a business’s site is destroyed because of fire, extra-expense insurance covers for the expenses required so that the business resumes operations through buying or leasing equipment, buying new merchandise and alerting customers about changes that have occurred. In the event that the business is not profitable for a certain period of time due to relocation, the business-interruption insurance applies.
Some businesses, however, either because of explicit risks or uncommonly high risk, may not be eligible for a BOP. In that case, single peril policies need to priced and studied. Also, business owners should keep in mind that BOP coverage is typically lower than in a regular property insurance policy. Hence, businesses that require high amounts of coverage should better keep the two policies separate.
Property insurance reimburses loss or damage in two ways.
Actual Cash Value (ACV): Actual cash value is the value of the property loss. However, there are complications. For instance, if a $200,000 value car has been depreciated over a three-year period, it may have an ACV of $ 135,000 at the time of loss, after deducting depreciation. But, the value of the car will be determined by comparing its condition to similar vehicles. Replacement Value: Replacement value reimburses the actual amount required to replace the loss. For instance, if a new car costs $250,000 to replace, the insurer pays $250,000. Typically, replacement value coverage has high premium.
Some important considerations
Property insurance policies can be modified at any time during the lifetime of the contract. Business owners should have a good insurance professional who can inform them about modifications in the exclusions of the contract. Exclusions actually take away coverage and may not reimburse the insured at the time of loss if relevant coverage is excluded. Another modification may refer to endorsements that actually add increased coverage at a premium. Finally, schedules are lists of covered locations and property. Schedules need to be updated regularly and at any time a business site or major equipment changes occur. Otherwise, if a location or equipment is not on the schedules, a claim could be denied on that basis.
Insurers charge a premium for the risk undertaken to cover a business against certain dangers. Hence, businesses with advanced loss-control mechanisms and good claim histories pay lower insurance premiums than businesses with poor risk control measures and poor claims histories. Particularly, in the context of property insurance that compensates for large losses, business owners should manage business risk efficiently and take appropriate measures so as to achieve lower insurance premiums; the higher the risk of peril, the higher the insurance premium.
Keeping the highest possible deductible on property insurance lowers the insurance premium and allows claiming all the lost money. In contrast, if deductibles are low and insurance premium is high, then insurance claims will be against smaller losses and insurance may even be cancelled. Once cancelled, new coverage with a new insurer will be a tough project.
All above elements must be taken into consideration when assessing and evaluating property insurance for a business. A comparison based only on the premiums ignores the cost/benefit relationship between the premium paid and the coverage purchased.
By: Christina Pomoni
About the Author:
Property insurance insures a business against unexpected loss or damage to the business site and to its contents. Large losses to a business’s assets such as inventory, supplies, equipment, machinery, furniture, computers, money and securities, commercial vehicles, but also trademarks are covered by property insurance. Also, if the location of a business is rented or leased or moved to other physical locations, property insurance is carried by the terms of the lease or contract.
Typically, property insurance comes in the form of covering specific perils such as fire, flood and theft that result to large losses of money. This form of policy insures against losses from the single, identified peril.
However, property insurance comes also in a broad form that identifies a number of different types of perils and covers against losses from all acknowledged causes in the policy. Multiple-peril insurance policies cover fall of aircraft, volcanic eruption, damages to the building from falling trees, riots, strikes, civil commotions and malicious damages, glass and mirror breakage, food adulteration, short circuit of the building electric panel, third party liability for falling objects, employee confidence coverage for punishable acts, moving, restoring and reallocation expenses, owner and employee accidents and many others.
Property insurance is purchased based on several factors. One of them is the location that the business is established. For instance, a business established in Chicago will prefer insurance coverage for snow, ice or sleet damage. A business established in San Francisco will prefer an earthquake insurance policy.
Another factor is the business’s income and liability. Generally, property insurance policies are purchased through a Business Owner’s Policy (BOP), which offers property and liability insurance in a broad form property insurance policy. In some cases, BOPs include optional coverage such as business-interruption insurance and extra-expense insurance.
Business-interruption insurance provides coverage for taxes, debt payments, salaries, and loss of profit due to interruption of business. Extra-expense insurance applies for relocation costs after a covered damage has occurred. If a business’s site is destroyed because of fire, extra-expense insurance covers for the expenses required so that the business resumes operations through buying or leasing equipment, buying new merchandise and alerting customers about changes that have occurred. In the event that the business is not profitable for a certain period of time due to relocation, the business-interruption insurance applies.
Some businesses, however, either because of explicit risks or uncommonly high risk, may not be eligible for a BOP. In that case, single peril policies need to priced and studied. Also, business owners should keep in mind that BOP coverage is typically lower than in a regular property insurance policy. Hence, businesses that require high amounts of coverage should better keep the two policies separate.
Property insurance reimburses loss or damage in two ways.
Actual Cash Value (ACV): Actual cash value is the value of the property loss. However, there are complications. For instance, if a $200,000 value car has been depreciated over a three-year period, it may have an ACV of $ 135,000 at the time of loss, after deducting depreciation. But, the value of the car will be determined by comparing its condition to similar vehicles. Replacement Value: Replacement value reimburses the actual amount required to replace the loss. For instance, if a new car costs $250,000 to replace, the insurer pays $250,000. Typically, replacement value coverage has high premium.
Some important considerations
Property insurance policies can be modified at any time during the lifetime of the contract. Business owners should have a good insurance professional who can inform them about modifications in the exclusions of the contract. Exclusions actually take away coverage and may not reimburse the insured at the time of loss if relevant coverage is excluded. Another modification may refer to endorsements that actually add increased coverage at a premium. Finally, schedules are lists of covered locations and property. Schedules need to be updated regularly and at any time a business site or major equipment changes occur. Otherwise, if a location or equipment is not on the schedules, a claim could be denied on that basis.
Insurers charge a premium for the risk undertaken to cover a business against certain dangers. Hence, businesses with advanced loss-control mechanisms and good claim histories pay lower insurance premiums than businesses with poor risk control measures and poor claims histories. Particularly, in the context of property insurance that compensates for large losses, business owners should manage business risk efficiently and take appropriate measures so as to achieve lower insurance premiums; the higher the risk of peril, the higher the insurance premium.
Keeping the highest possible deductible on property insurance lowers the insurance premium and allows claiming all the lost money. In contrast, if deductibles are low and insurance premium is high, then insurance claims will be against smaller losses and insurance may even be cancelled. Once cancelled, new coverage with a new insurer will be a tough project.
All above elements must be taken into consideration when assessing and evaluating property insurance for a business. A comparison based only on the premiums ignores the cost/benefit relationship between the premium paid and the coverage purchased.
By: Christina Pomoni
About the Author:
I work as a financial and investment advisor but my passion is writing, music and photography. Writing mostly about finance, business and music, being an amateur photographer and a professional dj, I am inspired from life.
Being a strong advocate of simplicity in life, I love my family, my partner and all the people that have stood by me with or without knowing. And I hope that someday, human nature will cease to be greedy and demanding realizing that the more we have the more we want and the more we satisfy our needs the more needs we create. And this is so needless after all.
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