Buying Property Insurance for your Business (Part IV)

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 fourth 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 IV



By Daniel Hale

Cambridge Property and Casualty

Lesson 16: Use An Expert.

In the event you suffer a major loss, the insurance company will be represented by an expert, an adjuster, who is an expert in policy coverages and in negotiating losses. Do not expect that you will ever have the knowledge that your insurance company has. You need to be represented in the initial stages of a claim by an insurance attorney, an insurance agent that is an expert or by a public adjuster.

When these losses occur, public adjusters attempting to represent you for a percentage of the loss settlement may contact you. Do not make a decision immediately regarding a public adjuster but within a few days select either an attorney, an agent that is an expert, or a public adjuster and negotiate the appropriate fees. Usually, if your insurance agent is an expert, they should be able to represent you at no cost or at least at a cost that is less than that charged by public adjusters or by attorneys; however, that is not to say that attorneys or public adjusters should be ruled out. The key is to be represented and to not try to do it by yourself.

When you consider the selection of an expert to assist you in the process of loss adjustment, you may need more than one expert. For example, if you select an expert insurance agent or an attorney you will also need to select an expert CPA in the event of a business interruption loss. The insurance companies utilize forensic CPA’s that do nothing but determine the amount of business interruption losses. These are experts representing the insurance company. You will need an expert CPA on your side. A business CPA is not necessarily qualified to negotiate business interruption claims. These are expert CPA’s that specialize in business interruption claims.

Lesson 17: Do Not Reward Poor Performance.

The typical insured will do business with an insurance agent or company for a long period of time. This is because it is difficult to change relationships and can entail some work because of the fact that new insurance companies will want inspections, and going from a known relationship to an unknown relationship can be difficult.

If you have your insurance program analyzed by an attorney or other expert and you determine that there are serious deficiencies (deficiencies that can destroy the assets of your company in the event of an uncovered loss) do not reward bad performance by allowing your current agent to correct mistakes that were discovered by your expert. This rewards bad performance and leaves you in a situation where, after the initial corrections are made, you may be in the same jeopardy again in the future as your business changes and the insurance program does not keep pace with those changes or with market conditions.

So often insureds will accept proposals from other agents or reviews from insurance experts and the recommendations that are made by those individuals are turned over to the existing agent to incorporate into the current insurance program. Unless the expert is a fee-based expert, it is unlikely that the expert will be reviewing your insurance again only to be not rewarded with the business.

If someone is trying to sell you insurance this is not necessarily in your best interest. Find out whether your insurance agent is an expert and, if that person is an expert, whether they will continue to service your account after you placed the responsibility for your assets in their hands. With many insurance firms, the initial account executive that may have the expertise to put together your account properly and to make it bulletproof from insurance company issues, is not necessarily the person that will continue to service your account. Usually those agencies will place the service responsibility with people who are not as experienced. This is not the scenario that you want. In other situations, the so-called insurance representative is a sales person that works directly for the insurance company. These are known as direct writers. This is about the worse scenario because they have absolutely no clout with the insurance adjuster given that they are employees of that insurance company and you likely will be on your own in the event of a major loss.

Lesson 18: Have A Disaster Plan.

Fires and tornadoes happen to the nicest people in the nicest buildings in the nicest areas all the time. You need to give some thought before the disaster hits as to what you would do in order to stay in business.

Lesson 19: Always Insure Replacement Cost.

There is a big difference between actual cash value and replacement cost coverage under an insurance policy. Actual cash value is not defined in the insurance policy; however, traditionally it is a loss adjustment based upon the replacement cost of the building less physical depreciation. As an example, if you have a substantial roof damage claim and the roof is let’s say 30 years old, it probably has no value and the insurance company under the actual cash value concept would not owe you any money.

If you have replacement cost coverage, however, they will owe you the cost of a new roof. The insurance policy must indicate that replacement cost coverage is provided or the policy will be settled on an actual cash value basis. Remember, however, that your values should also represent replacement values. Replacement values do not, in the case of machinery and equipment, necessarily mean that you will obtain cost new but the insurance company will replace with some equivalent property that is available.

A related issue with replacement cost is a policy requirement that you make a replacement cost claim within 180 days even if you have replacement cost coverage. Let’s say that you have a building that is insured for $1,000,000 and the agreed replacement cost of that building after the loss is $1,000,000 and that the agreed actual cash value amount is $500,000.

After the loss is negotiated, the insurance company will pay you $500,000 and after you have spent the money to replace the building, the insurance company will pay you an additional $500,000. In other words, you have to replace to obtain replacement cost; however, in order to obtain replacement cost coverage, you must actually make a claim for this within six months of the loss date. Many insureds forget to do this and the insurance company could deny the replacement cost difference at a later date. Make your replacement cost claim from Day 1 so that this item is not forgotten.

Photo Credit: Thanks to Patrick Stahl,