Buying Property Insurance for your Business (Part II)

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 second 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 II



By Daniel Hale

Cambridge Property and Casualty

Lesson 5: If The Insurer Requests an Examination Under Oath, Obtain Legal Counsel.

Insurers reserve the right in property insurance policies to take examinations under oath. If one is requested of you or someone else in your business, obtain legal counsel to represent you. These examinations under oath are equivalent to depositions and can be used against you in subsequent litigation, if that arises. These examinations also serve as the basis from which many insurers will attempt to deny coverage.

Lesson 6: Don’t Assume That You Can Rebuild In Six Months.

Rebuilding a building is a time-consuming process. First, you have to negotiate with the insurance company to obtain the money necessary to rebuild. This process can be daunting. The insurance company will not agree to a settlement until their expert has reviewed the damages and computed the replacement cost. This is not done overnight on major building losses. In addition, you will have to obtain municipal permits to rebuild. This is not as easy as it sounds. Your building may not be up to code and, in fact, you may have to obtain a variance from the municipal authorities in order to rebuild. Any type of municipal delays because of this can cost you at least 120 days.

Next, you must negotiate with your own contractors to rebuild. Just because the insurance company obtains a replacement cost estimate from a contractor does not necessarily mean you have to use that contractor. As a matter of fact, in many cases you can settle with the insurance company based upon their contractor’s estimate and utilize your own contractor to do the rebuilding.

Ultimately, you are the one entering into the contract – not the insurance company. If the builder does a bad job or does not perform on time, it is your problem, not the insurance company’s problem. The insurance company is not obligated to repair or rebuild your building – you are. The insurance company will, hopefully, provide you with enough money to do so.

In any event, the minimum time you should be thinking about relative to the reconstruction period should be 12 months. To accomplish this you would have to move quickly and hope that your contractor can obtain the subcontractors necessary to rebuild.

Lesson 7: You Probably Cannot Restore Your Business In Six Months.

In discussing the limits that are necessary for business interruption, some insureds and agents will think in terms of being back in business in six months. Obviously, if you cannot rebuild the building in six months, you cannot be back in business in six months unless you have secured a replacement building elsewhere. Furthermore, just because you have rebuilt a building in 12 months does not necessarily mean that your customers will be waiting for you in 12 months. They most likely will have gone elsewhere, and it could take another 12 months to regain your customer base. This leads to problems from an insurance claims handling standpoint.

An insurance policy typically will provide for coverage for business interruption during the period of time it would take with due diligence to replace the building plus 30 days. (Some policies place a cap on this of 12 months. Do not accept this 12 month limitation unless you are a tenant that has the ability to move elsewhere quickly.) If the insurance company has an expert that indicated that the building can be rebuilt in 12 months your business interruption recovery will be limited to that period of time plus another 30 days. That 30-day period can and should be increased to 60, 90, 120 or even further. This allows you to recover your customer base and restore your income to the levels that existed prior to the loss. However, just because you negotiate with the insurance company an extension of the period of recovery does not necessarily mean that your limit of business interruption insurance will be adequate. Typically you will have negotiated a limit covering loss of business for one year and not for two years. Think in terms of at least a two-year recovery period under your loss of income coverage and be certain that your insurance policy is endorsed accordingly.

Lesson 8: Your Customers Will Enforce The Terms Of Contractual Penalties.

In the event you have a major fire or other casualty loss that disrupts your business, chances are you may disrupt someone else’s business. For example, if you are a supplier to the automobile industry, you may shut down an assembly line. This can lead to massive penalties. As a matter of fact, a 24-hour shut down can result in penalties of $720,000 from one major auto maker.

The typical insurance policy does not provide coverage for contractual penalties. You can anticipate that your customers will enforce their rights to sue you for their losses because of your disruption. Be certain that your insurance policy does cover contractual penalties with sufficient limits. See our separate report on contractual penalty legal issues and coverages.

Lesson 9: Document All Conversations.

When a major loss occurs you will be contacted by an insurance company adjuster early in the process. Document, in writing, all conversations you have with that adjuster. The adjustment process breaks down when the checks for payment must be written. This may not take place until six months after the loss occurs. The conversations you had with the adjuster after the loss will no longer be remembered by you (in most cases) but certainly will be remembered by the adjuster. The adjusters are documenting all conversations and you need to do the same. The loss negotiating process is a difficult one and needs to be handled in a diligent, logical, businesslike manner, just as if you were preparing for a lawsuit, because you may be.

Photo Credit: Thanks to Patrick Stahl,