100 INSURANCE MYTHS (#1 of 8)

This is the first of an 8-part series dealing with insurance myths. We all know that insurance is one of the major risk management tools for any sport, fitness, or recreation business. For many of us, however, insurance is just a big mystery which we entrust to others. After this series you will know many pitfalls and minefields to avoid. Thanks goes to Daniel P. Hale for contributing this series to Sportwaiver.com. The first three segments of the series will focus on property insurance.


1. 100% coinsurance is better than 80% or 90% coinsurance.

Actually, the reverse is true. In the event you must have a coinsurance clause, 80% coinsurance is better because in that case you have only promised to insure 80% of the replacement cost of your building (or personal property as the case may be) which gives you more leeway than if you had promised to insure 100%.  Under coinsurance clauses, which are present on most property insurance policies, you are penalized in a loss adjustment if you have not insured the values that you promised to insure.  If you promised to insure 100% and insured only 50%, you receive 50% less than your actual loss.  You should avoid coinsurance provisions through negotiation of agreed value endorsements.

2. Replacement cost means new.

Actually, replacement cost means comparable material and quality, which means that the insurance company can replace the personal property item with something that is used if available and comparable.

3. Actual loss sustained under business interruption is good.

Actually, actual loss sustained is not preferred.  Under the actual loss sustained business interruption form you are covered for your actual losses without a limit up to the period of time it takes you to rebuild the building with due diligence.  If it takes you six months to rebuild the building with due diligence you will be covered for up to six months of your losses.

Although this appears to be attractive because there is no limit, it is limited to only 12 months maximum reconstruction time.  Reconstruction time could extend well beyond 12 months and even after reconstruction is completed.  After reconstruction is completed, your losses could continue because you may have lost customers during reconstruction and it may take you several years to recover those customers.  The actual loss sustained form should be avoided, and instead you should have a specific limit which will cover you without any 12 month limitation as long as you are using due diligence to repair or replace the building.

Furthermore, you should have an extended recovery period endorsement which will extend recovery after reconstruction is completed by an additional period of time, preferably at least one year.  Under the better forms it would be unlimited until the policy limit is depleted.  Be careful in establishing a limit.  Remember that coverage extends beyond 12 months and your limit should reflect this.

4. Business interruption will cover the period of time it takes to rebuild.

This is not necessarily true.  Insurance companies cover the period of time it takes to rebuild with due diligence; however, there is no coverage for any excessive delays, there is no coverage for delays as a result of zoning ordinances, and there may not be coverage if you are able to relocate without rebuilding.  Furthermore, as we indicated, if the time to rebuild exceeds 12 months and you have an actual loss sustained policy, coverage is provided only for 12 months.  Also, your business interruption may continue well beyond the period of time it takes to rebuild or relocate and business interruption insurance will only cover the period of time it takes to rebuild or relocate.  An extension is required to cover loss of sales after the rebuilding period is completed.

5. Since I do not have steam boilers, I do not need boiler and machinery coverage.

While it is true that you only are mandated to have boiler and machinery coverage if you have a steam boiler (because otherwise there is no coverage for explosion that takes down the building), the modern boiler and machinery policy (also known as equipment breakdown insurance) will cover many other mechanical breakdown risks, such as electrical arcing within your electrical panels, breakdown of compressors, transformers, mechanical systems, and machinery including computers.  Power surges can also wreak havoc with equipment and equipment breakdown insurance is needed to cover this.

6. I don’t need to insure personal property owned by others – they have their own insurance.

While it is true that the owner of personal property in your custody may have some insurance, that insurance will not protect you and, in fact, that insurance company will sue to recover its losses cause by your negligence.  If you have personal property of others in your possession, your insurance policy typically will automatically cover only a very small amount.  Coverage needs to be specifically identified under the policy and a limit needs to be negotiated.

7. I don’t need to insure my personal property that may be located at another company’s location because they have insurance.

That company may be only liable for their negligence to your property and not for other losses that may damage the property.  You need to have personal property coverage on your policy covering other locations.

8. Power failure that interrupts my business will always be covered under business interruption coverage.

This is not true because power failure must be as a result of a covered cause of loss that occurs on your premises and if you have off premises power failure coverage, there has to be a covered cause of loss to the utility company property off premises, such as a power substation or transformer.  During the recent major blackout on the East Coast, including Michigan, insurance companies have not provided coverage because there has not been established a covered cause of loss, such as a fire, to a utility substation.

9. Valuable papers coverage extends to storage sites.

This is not correct. When you have valuable papers coverage which protects you for the reconstruction of valuable documents up to a specified limit, it covers only on premises losses and off premises coverage is only provided with a low limit.  Off premises storage should be scheduled on your policy for valuable papers.

10. Computers are personal property and additional computer coverage is not necessary.

While it is true that computers are personal property, the standard personal property coverage form will not provide insurance for power surges or loss of media.  A specialized form is necessary to cover those perils as well as business interruption.

11. The debris removal expense limit under my policy is in addition to the limit provided for building insurance.

This is incorrect.  In the event there is a loss to your building, the insurance company will pay for the removal of the debris; however, that expense is within your policy limit except for a small add-on of typically $5,000.  Always factor in debris removal expense in the limits you insure.  As a rule of thumb, increasing the replacement cost value of your building by 25% is a good idea.

12. The lower deductible the better on property insurance.

Actually, the highest deductible is better.  If you turn in small claims, the insurance company will end up charging you for those claims by way of higher rates in the future or may cancel you. The property insurance policy is not a maintenance policy; it is a policy to cover catastrophic losses.  It is better to take a lower premium because of a higher deductible and to self-insure smaller maintenance losses. Certainly any deductible less than $1,000 is not appropriate and in today’s hard insurance market, a deductible of $10,000 to $50,000 should be considered.

13. Fire coverage includes damage to money.

This is a fallacy.  The basic insurance policy has very low limits on fire damage or other theft of money.  A money and securities policy is necessary.

“This Article was submitted by Daniel P. Hale, J.D., CPCU, CRM, ARM, CIC, AAI, LIC, AIC, AIS, API, AU.   Mr. Hale is vice president of Cambridge Property & Casualty and an attorney licensed to practice law in the State of Michigan.  He can be contacted at 734-525-2429,  [email protected] or via www.cambridge-pc.com.