This is the third 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.
Property Insurance Losses
1. If the city delays my rebuilding because of building codes and I have to get a variance, coverage is provided under business interruption.
Not true. There is no coverage for delays because of building codes. This coverage has to be added.
2. If the city requires that I tear down the undamaged portion of my building because more than 50% of my building was damaged, I will be covered for the loss of the undamaged portion of the building.
This is not true. You have to have ordinance or law coverage for this to be covered.
3. If my stock is damaged I will be paid invoice cost because coverage is on a replacement cost basis.
This is incorrect. If stock is damaged, the insurance company will pay replacement cost which does not include a profit. You need to have a selling price endorsement for products manufactured in order to obtain a selling price.
4. My policy has an ordinary payroll exclusion which excludes coverage for any so-called ordinary employees. This is in my best interest.
This is not true. When you exclude ordinary payroll you exclude not only important people, such as supervisors, but you also exclude most office people. These office people, bookkeepers, accountants and others, can be very difficult to replace if they seek employment elsewhere because coverage for the payroll is not provided under business interruption. Ordinary payroll exclusions should be utilized very sparingly.
5. I don’t have to worry about fires at a supplier’s or customer’s location.
While you may not have any personal property at a supplier’s or customer’s location, the inability of that supplier or customer to provide supplies to you may interrupt your business. The standard business interruption form does not cover losses at other than your location. Contingent business interruption coverage needs to be negotiated.
6. “All risk” contents is the broadest form of coverage that I can buy.
While the words “all risk” would suggest that this is the case, this is not correct. For example, the standard so-called “all risk” form excludes coverage for earthquake, flood, off premises utility failure, sewer backups, surface water, steam boiler explosion, mechanical breakdown, electrical arcing, food spoilage, many environmental claims, and mold to name a few. The coverage form that is utilized on your account should be carefully evaluated because many of the exclusions can be bought back.
7. A protective safeguards endorsement is good.
Although protective safeguards sounds like an innocuous phrase, it can spell disaster. Under this endorsement, the policy requires that any burglar alarm or fire sprinkler systems be maintained in good working order. In the event they aren’t, and a fire or other loss occurs, you would not have coverage.
8. If I lease my building from others, I don’t need building coverage.
This is a major fallacy. In the event you lease a building from someone else, you could be liable for any building damage caused by your negligence. This building damage is not covered with the exception of a small limit for fire and explosion that is provided under the general liability form. You should have a waiver of subrogation in your lease that blocks this type of claim and/or you should have broad form coverage under your policy for damage to the building arising out of fire and other perils caused by tenant negligence.
9. I don’t need terrorism coverage.
Actually, your mortgagee will require that you have terrorism coverage.
10. Equipment insurance, covering tools and contractor’s equipment, is always provided on a replacement cost basis.
Typically coverage is not provided on a replacement cost basis but is provided on an actual cash value basis which contemplates market value and depreciation.
11. If molds or dies are stolen from my manufacturing plant, I should have unlimited coverage.
Actually, the standard Insurance Services Office property insurance policy has a special limit of liability for patterns, dies, molds and forms in the amount of $2,500 for theft. Also, it is important to note that the mysterious disappearance of these items would not be covered under most insurance policies.
12. If my building is destroyed by fire, the insurer will pay the replacement cost if I do not rebuild or buy another building.
Under the standard liability policy, the insurance company is obligated to pay the actual cash value or the depreciated value of the building until it is actually replaced. It typically does not have to be replaced on the same site but the building must be for the same purpose if it is built elsewhere, in which case after the rebuilding is complete the insurance company will pay the difference between the replacement cost on the original site and the actual cash value paid in the initial settlement. It is also important to note that in the standard policy language, the language indicates that you have 180 days after the loss to indicate to the insurance company your intent to replace the building.
13. If I lease my building to someone else, it is best to have them insure the building.
Actually, as a general rule you never want to have someone else responsible for insuring your assets. In virtually every case, this will not be done correctly. The tenant, for example, insuring the landlord’s building will be less concerned about the appropriate limits, having ordinance or law coverage, having the coinsurance clause waived, and having replacement cost coverage provided.
Moreover, the tenant in the building is unlikely to have a separate policy issued for the landlord which means that in the event of a loss the loss to the building will be on a check made payable to the tenant and, therefore, if the tenant happens to go bankrupt, that amount will be part of the tenant’s bankruptcy estate and not necessarily available to the landlord.
Worse yet, if the tenant destroys your building through an act of arson, you the landlord will not be covered.
Avoid having someone else insure your assets to avoid the problem of inadequate insurance and the loss payment being paid to an unrelated party.
“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” .