Property Insurance: Are You Covered?

By JoAnne Sommers

Insurance isn’t necessary… until you need it. And then it may be too late.

Small business owners wear many hats: visionary, service provider, marketer, administrator and financial manager, to name a few. And in the midst of juggling all those responsibilities it’s easy to overlook the details of property insurance coverage. Easy but potentially dangerous.

“Few people take the time to analyze their property insurance policies in detail,” says Adrian Mastracci, portfolio manager with KCM Wealth Management Inc. in Vancouver. “But you don’t want to be underinsured, whether you own or rent. That’s why it’s important to be proactive and conduct risk management assessments for your property needs.”

Property insurance can be purchased on the basis of « replacement cost » or « actual cash value ». Replacement cost is the amount it would take to replace or rebuild your business, or the damaged part of it, with materials of like kind and quality, without deducting anything for depreciation. Actual cash value is the amount it would take to repair or replace the damaged or stolen property after deducting for depreciation.

Small business people often make the mistake of not getting replacement cost insurance, says Laurie Gottenbos, commercial insurance agent with Johnston Meier Insurance Agencies Group in Kelowna.

“Even though it costs more, always insure for the replacement cost of equipment and fixtures,” she advises. “But remember that stock is always valued at actual cash value, which means you get what you paid for it minus the depreciation.”

Gottenbos says that because every business is different, it is up to the owner to estimate the cost of replacing the business premises (if owned), any improvements you’ve made (if leased), plus inventories, equipment and other materials, and insure accordingly.

“Look at your receipts for major purchases and talk to your accountant about what it would cost to replace everything,” she advises.

Liability Protection

A lawsuit could mean a catastrophic loss to your business, so be sure to carry enough liability insurance to protect yourself in the event of injury, death or property damage caused by your products, business operations or employees.

Think of liability insurance as a safety net that protects your financial assets, says Mastracci. “Start with the third-party liability needs for each of your business locations. A minimum of $1 million coverage is a start, although coverage in the $2-to-$5-million range may be more appropriate.”

The maximum third-party liability coverage on most policies is $2 million, he notes. However, an umbrella liability policy can provide protection over and above the limits of commercial general liability and commercial automobile policies. To decide whether you need an umbrella policy, think of the most extreme situation that could happen in your business and determine whether your current liability policies would cover this risk.

Other Coverages

Depending on the size of your business and the nature of your operations, there are other coverages that you should consider.

A business interruption rider covers loss of earnings as a result of damage to or destruction of property. This coverage generally provides reimbursement for salaries, taxes, rents, and other expenses, plus net profits that would have been earned during the period of interruption, up to the limits of the policy.

“We recommend that business owners insure for loss of income in the event that premises are temporarily unusable due to fire or some other disaster,” says Gottenbos. “Insurers provide forms that can be used to estimate how much of a company’s profits and salaries will be lost until the business is up and running again.”

If you lease or rent your place of business, you may require tenant liability insurance in the event of fire, explosion, water leaks and other mishaps, she adds. “If, as a tenant, you are held responsible for a loss, even an accidental one, the landlord’s insurance company may go back to you to recover their losses so you should consider protection to cover that. The limits are usually $500,000 for a standard small policy.”

Coverages may be purchased to cover your stock and fixtures in the event of burglary and robbery, to protect money and securities, or to protect against counterfeit currency or employee dishonesty.

Exclusions and Expenses

Make sure you understand the exclusions in your policy. For starters, investigate whether damage from broken pipes or sewer backup is covered.

Most companies also have a rider for earthquake and flood coverage. Your location and the probability of occurrence determine the premium and availability.

The Bottom Line

Make a real effort to understand your property risks and review your insurance coverage needs annually, says Mastracci.

“Having a long chat with one or more property insurance agents is time well spent. Remember that protecting your business from a financial disaster deserves your full attention.”