Buying Property Insurance for your Business (Part I)

One of the most important decisions that a sport- or recreation-business owner and/or manager must make is the purchase of business property insurance. This is the first of a five-part series on critical considerations that one faces in the purchase of appropriate and adequate property insurance. The series is authored by Daniel Hale, a real expert in the field of insurance. Hale is located in Michigan so some of the considerations relate specifically to Michigan law. It is important that the reader find out if the reader’s state law is different.

Part I



By Daniel Hale

Cambridge Property and Casualty

Over the past 30 years as insurance coverage attorneys, expert witnesses in property insurance claims, and insurance agents, we have been involved in over $100,000,000 of major property claims. As a result, we have learned many lessons, and the purpose of this publication is to relate those lessons to you in hopes that in the event you do suffer a property insurance loss, the claims process will go smoothly.

Lesson 1: Bad Faith Causes Of Action Against Insurance Companies Are Generally Not Recognized In Michigan, But You Should Be Aware Of Your Remedies In The Event Of Nonpayment Of A Valid Claim.

Bad faith causes of action against an insurance company for failure to pay a claim have not been recognized by Michigan appellate courts to date. As a result, do not expect to be able to “punish” an insurance company for its failure to pay a claim by prevailing in a bad faith lawsuit.

Many property insurance policies contain limitations on the time in which you can sue an insurer for nonpayment of a claim, and these limitations have by-and-large been recognized by Michigan courts. Therefore, you should not delay seeking legal advice in the event of nonpayment of a claim. If an insurer does not pay a property insurance claim within 60 days of receipt of the proof of loss, you may be entitled to 12% interest on the claim pursuant to Michigan statute. It is surprising how many adjusters are unaware of these laws.

You should know that in the event of a breach of the policy contract, an insurer could be liable for the payment of damages flowing directly from the breach. For example, where an insurer refused to pay a claim on damage to a business use van, the policyholder was permitted to sue the insurer for lost profits after it failed to pay the claim.

Lesson 2: Just Because Your Agent Says It Is Covered Does Not Make It So.

In Michigan, the insurance agent represents the insured and not the insurance company and, therefore, statements of coverage made by the insurance agent do not necessarily bind the insurance company. Therefore, it is imperative that you rely on the policy language or endorsements issued by the insurance company. The insurance policy is nothing more than a contract that spells out the rules of the game. It is important to become familiar with those rules and to be certain that the contract itself is reflective of the understanding between the parties.

Of course, if your agent does make a misstatement regarding coverage, that agent could have liability to you and is hopefully covered under an Errors & Omissions insurance policy; however, obtaining payment under an agent’s Errors & Omissions policy is usually a time consuming and expensive process. It is far better to be certain that the insurance policy itself is correctly negotiated.

Lesson 3: All Insurance Policies Are Not Alike.

If you count the words in property insurance policies from different insurance companies covering the exact same risk, you will find that there is a wide variance in the number of words used. These insurance policies are all different. Furthermore, they are all negotiable. Do not assume that purchasing a policy with the lowest price (or the highest price) necessarily makes a difference in coverage.

The negotiation, however, has to take place before the policy is placed. In order to accomplish this you must be certain that you have, as your negotiator, an insurance agent that is an expert in the negotiating process. This means that the agent must know how to negotiate with the insurance company underwriter and must know what items can be negotiated. This varies with insurance companies; however, there is no substitute for a thorough knowledge of the policy provisions by your agent.

Insureds typically have agents worrying about the wrong thing and that is the premium level. The lowest premium level may not be the best in your particular situation. The agent should be obviously negotiating a competitive premium but also should be bullet-proofing your coverages so that the insurance company has less opportunity to avoid paying your entire loss.

Lesson 4: Coinsurance Will Ruin You.

If your insurance policy has any type of coinsurance clause, it could lead to disaster. Coinsurance, simply put, is a promise you make that you have insured adequately. For example, if a policy has a 100% coinsurance clause, you have made a promise that the value on the policy (let’s say $1,000,000 in building coverage) is equal to 100% of the replacement cost of the building.

The problem lies in the definition of replacement cost. What you may think is the replacement cost under non-emergency conditions using a non-union contractor can be totally different from an appraisal done by the insurance company that would indicate that the replacement cost of what you believe is $1,000,000 is actually $2,000,000 under emergency conditions using a union contractor. Clients usually under-estimate the replacement cost of building and personal property items confusing replacement cost with market value. If a coinsurance clause exists, you will be penalized if you are wrong in your values. If the building is insured for $1,000,000 and it should have been insured for $2,000,000 and you have a $100,000 roof damage claim, you will only receive $50,000.

Insurance carriers do impose coinsurance penalties and courts recognize them. These penalties are not necessary and can be waived in many cases when you purchase the insurance policy. Of course, you may have to establish that you have insured to value, or you may have to insure in accordance with what the insurance company feels the value is. Also, look for hidden coinsurance clauses. Some companies will waive the coinsurance for building and personal property but not waive it for computer equipment or for mobile equipment. Similarly, a builder’s risk policy may have a coinsurance clause that is termed a “100% completed value clause.” This does the same thing and, again, should be waived. There are also “hidden” coinsurance clauses in some small business owner’s policies where certain replacement cost representations are made.

Photo Credit: Thanks to Patrick Stahl,