Common Business Property Insurance Gaps

To lecture business owners about the need for business insurance is like preaching to the already converted. They know the risks that they face, and do their best to take the insurance coverage they need within the insurance budget available to them, especially when it comes to business property insurance. In a perfect world, a business would be insured against every possible calamity. But we do not live in a perfect world and insurance costs money and with competing demands for every dollar, business owners opt for optimal, not total, coverage. It makes sense – why should a business located in a place that has never seen an earthquake take out earthquake insurance?

Business property insurance offers protection against loss or damage to the place of business and the contents of the premises. The first thing to do to ensure that a business is properly insured is for the owner to ask himself a question – “ If the premises and contents are lost, will the coverage enable me to go back to where I was before the loss?” This can be done by totaling the cost of recovery from catastrophe and seeing if the coverage is for the same amount. But it’s not that simple. There are usually exclusions that limit the coverage and it is in these gaps in the protection that danger lurks.

Plugging the Gaps

The first thing to look at is the total cost of recovery. This is not the same as a valuation for property tax or real estate marketing – these will never cover the cost of getting back on your feet. The cost of recovery is a top down valuation of what it will cost, at the current prices, to recreate everything. This can be done by getting estimates from builders and suppliers and basing the coverage on that. It could result in overestimation, but after a disaster, you will not be in a position to spend time shopping around for the best deals. Overestimation is better than getting caught short. This is an exercise that must be done once a year.

Most commercial property insurance plans do not include floods or windstorm damage or loss. These are not frequent occurrences in many parts of the country if there has been no severe weather for a couple years, people tend to forget about the dangers. And the premiums are not cheap. But after Katrina, Sandy, Ike and other storm and flooding disasters, it is obvious that these things can occur without warning after a long period of quiet. If your business is in a floodplain or a region where windstorms can occur, even if they have not for many years, you should check the exclusions on your insurance and plug any gaps in your coverage.

Another often overlooked gap is Ordinance Compliance Coverage (also known as Ordinance or Law Coverage). This will cover the costs of upgrading a structure to conform with existing building codes. But what does this have to do with a disaster? An existing structure may not have to comply with modern codes as long as the structure is not rebuilt or renovated. But after a disaster, if substantial repair or rebuilding is required, then modern codes must be complied with. And these cost money. For example federal regulations require that if a structure on a flood plain is damaged in excess of 50% of its market value, it must be rebuilt in conformity with current codes. In most cases, business property insurance does not cover this additional cost. If you do not have this, getting this extra coverage is a very worthwhile expense.

The right thing for a business owner to do is to consult an insurance professional to look at all the coverage options (and costs) available to him. Each potential coverage option should be reviewed in terms of historical risk, operational risk and complete repair and / or replacement costs. Covering every base may not be possible, but knowing where you are unprotected will at least prevent any unpleasant surprises.

Insurance by Allied Brokers has been helping businesses in the Bay Area for over 50 years with their property insurance needs. If you have questions about the possible gaps in your business property insurance, call us at (650) 328-1000.