What is the Proper Amount of Business Insurance?
The desire to minimize the costs of insurance premiums is perfectly understandable. Your business might be having a rough year, or perhaps you’re trying to pay for a major expansion. It makes sense. What you don’t realize is that you’re potentially leaving yourself on the hook for thousands of dollars in out of pocket losses. The reason why is something called a co-insurance clause.
Say you cover your building and the equipment it contains for a total insured value of $700,000. But you’ve purchased a great deal of expensive equipment over the years, or the building has been improved, so its current value is actually higher. One day, a fire breaks out, and damages are estimated to be $500,000.
This is when the co-insurance clause comes into play. Commercial insurance policies typically mandate that a business must be insured for a given percentage of the current total monetary value. This figure is usually between 80 or 90 percent, but can be as high as 100%. The business in the above example is insured for $700,000, but after the fire is assessed to have been worth $1,000,000. In this case, the policy mandated at least 80% coverage of the total value of the company, but it was only insured for 70% of the current value. This is in violation of the co-insurance clause, and so the policy owner will only receive 70% of their insurance claim—in this case, $500,000 x 70%, or $350,000.
If the policy owner had covered the business for $800,000, then they would meet the 80% coverage requirement of the policy, and thus would receive 100% (not 80%) of their claim, or $500,000.
Hopefully, this example illustrates how important it is to maintain proper coverage of your business, and how devastating failing to do so can be to your livelihood. Scrimping on your insurance coverage to save money is a hazardous cost-reduction measure. Have a discussion with your insurance agent, and assure that your business is adequately covered.