How much insurance should you carry for your business’s property?
It’s always a tricky question, filled with uncertainty and with several variables to consider. On the one hand, purchasing insurance limits that are high enough to make you feel comfortable can be quite costly. On the other hand, if your business property is hit with a large loss, you want to know that it will be protected.
“The goal is to make sure that if your company is faced with a loss, you have an adequate limit in place to cover that loss,” says Nancy Hamilton, an account executive with ECBM Insurance Brokers and Consultants.
Even after you have examined all the angles and found a limit you can afford that protects what you need it to protect, you must stay vigilant, because what may be an adequate limit today may not be enough in the future.
Smart Business spoke with Hamilton about how to choose an adequate insurance limit to cover your business property.
Re-posted by: A. Joseph Marshall
Commercial Real Estate Agent
Savannah, Ga.
Why is it important for companies to choose an adequate limit to cover their business’s property?
In the event of a loss, you want to have an adequate limit to cover the loss. You want to have sufficient coverage and limits to be able to resume operations as quickly as possible. You want to be able to have your business back in the same position as prior to the loss. Many companies do not have the cash reserves readily available to cover all of the costs associated with a loss.
If you currently have a loan, or are considering one in the future, that is another reason to have an adequate limit in place. Many loan documents require businesses to show proof of proper coverage and limits in order to meet the loan requirements.
How can companies determine an adequate limit for their specific property?
Proper property valuation is critical in determining an adequate limit. There are various tools that can be used to calculate the value of the property to be insured, such as original cost of construction with adjustments for inflation, current construction costs and real estate appraisals.
There are also replacement cost estimators that provide important calculations to help businesses determine their valuation. These calculations are based on the square footage of the building and the building’s construction, including the types of materials used in the construction and type of building such as a commercial office building, manufacturing building, industrial building, etc.
Business income worksheets are used to calculate or estimate your organization’s exposure to a business income loss for the purpose of establishing your limit.
How does a business’s geographical area affect property limits?
Construction costs can vary depending on the geographic area of your business. For example, construction material may be readily available in some areas. However, during a major catastrophe, constructions materials may be in high demand, which can drive up costs significantly. A shortage of supplies in your area may extend the length of time that you are out of business.
How is property valuation determined, and what factors are used?
The value of your business assets needs to be considered. That includes your building, if owned, your business and personal property, as well as any potential loss of income, continuing business expenses and additional expenses you may incur after a loss. You need to consider how long it will take for your business to get back up and running at the same level as prior to a loss.
What time frame should be considered when determining loss of income?
You need to consider your worst-case scenario as to the length of time to be back in business. Items to consider are type of loss, extent of loss, and supply and demand for labor and materials. The longer it takes for your business to get back up and running, the more costs you are going to have associated with the claim.
How can companies with multiple locations determine an adequate limit for their properties?
Companies with multiple locations can use one blanket limit or loss limit to cover all locations. There are several factors to consider when determining an adequate limit for multiple locations. Are your locations in close proximity of each other? If you have a large concentration of locations in the same geographical area, you could have a significant impact from a single event. However, if your locations are spread out, then the risk of a single event impacting multiple locations is not as likely.
Establishing an accurate value for each location will help you determine the maximum possible and probable loss. Once the value of each location is determined, you can select a blanket limit or loss limit to cover all locations.
How often should a company have its locations evaluated?
It is recommended that the valuation of a business’s locations be reviewed at least on an annual basis. Some factors can change over the course of a year, and those changes need to be reflected in a new limit. Inflation and construction costs, in particular, can have a huge impact on the valuation of a business.
Nancy Hamilton is an account executive with ECBM Insurance Brokers and Consultants. Reach her at (610) 668-7100, ext. 1263, or nhamilton@ecbm.com.
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