What Kind of Insurance Do I Need to Purchase for My Business? - PART 1
Depending on the individual risk characteristics of your business, the broker agent will present you with different coverage options for purchasing commercial insurance. A broker-agent's proposal is just that, a proposal.
When all is said and done, it is your responsibility to make an informed decision and choose the insurance that best fits your business plan. The relationship that you build with a broker agent is extremely valuable in this critical decision-making process. An experienced broker agent has dealt with hundreds of businesses similar to yours. Since commercial insurance can be complicated, you should feel free to discuss any terms, conditions, or concepts that are unclear to you with your broker agent. It is part of a broker-agent's service to answer your questions and help you understand the insurance you are purchasing.
While your business may not need all commercial coverage lines, it is a good idea to have a basic knowledge of the types of insurance coverage available. As your business changes and expands, you will have the necessary knowledge to purchase insurance coverage as new exposures arise. The following commercial lines of insurance cover broad areas of exposure common to most business operations:
Boiler and Machinery
Commercial General Liability
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Commercial insurance is divided into two main categories: property insurance and casualty insurance. Property insurance provides coverage for property that is stolen, damaged, or destroyed by a covered peril. The term "property insurance" includes many lines of available insurance. Commercial Property, Inland Marine, Boiler and Machinery, and Crime are the most common commercial property coverage lines. Each of these property coverage lines is described below.
Coverage Sections, Limits of Insurance, and Coinsurance
Buildings you own or lease as a part of your business, your business personal property, and the personal property of others make up the basic coverage sections of commercial property insurance. Commercial property insurance can be sold separately as an Individual Line policy (referred to as a monoline policy), or it can be sold as part of a Commercial Package Policy (CPP), which combines two or more commercial coverage parts such as commercial property, general liability, and commercial auto.
Building coverage includes buildings or structures and any completed additions, which are listed on the declarations page of a commercial policy. Permanently installed fixtures, machinery, and equipment are also insured as a part of building coverage. The limit of insurance is the estimated amount needed to rebuild your building and to replace permanently installed fixtures, machinery, and equipment in the event of a total loss. You are required under the insurance policy to fully insure the value of your buildings. If a building is not insured to value, you can be subject to a monetary penalty at the time of a loss. This penalty is commonly referred to as "coinsurance." It is important to read and understand the coinsurance clause of your commercial property policy and to discuss any questions with your broker-agent.
Business Personal Property consists of furniture; fixtures, machinery, and equipment not permanently installed; inventory; or any other personal property owned by and used in your business.
Personal Property of Others refers to property that is in your business’s care, custody, and control. The type of business you operate will determine if you need to protect the personal property of others.
Covered Causes of Loss
Whether a property loss is covered depends upon the policy language, exclusions, and endorsements. You can choose the covered causes of loss in your property policy. Causes of loss are divided into two main categories: specified perils and open perils.
Specified Perils consist of a list of each peril to be insured against, such as fire, explosion, windstorm, vandalism, et cetera. You can usually request basic specified perils or broad specified perils coverage. Broad specified perils coverage adds to the list of covered perils found under basic specified perils.
Open Perils coverage covers all losses unless they are specifically excluded. Earth movement (including earthquakes) and floods are two common perils that are excluded under open perils coverage. Since open perils coverage offers more comprehensive protection, it is more costly than a specified perils' policy.
Commercial property coverage will include a provision to determine what valuation method is to be used to pay the loss. The most common policy valuation method is Actual Cash Value (ACV). Unless otherwise defined in the policy, ACV is considered to be Fair Market Value in California. There are two other methods of property valuation: agreed value and replacement cost. Agreed value waives any coinsurance penalty and pays 100% of the stated amount (agreed upon amount) for any covered loss. Replacement cost covers the amount it takes to replace your property with new property of like kind and quality, up to the limits of insurance. Like ACV, replacement cost is subject to coinsurance.
Coverage Forms and Endorsements
There are various coverage forms and endorsements in addition to the basic property coverages already discussed that can customize coverage in a commercial property insurance policy. The following are the most common coverage forms and endorsements used in commercial property insurance:
Builder's Risk – Added to a policy for a one-year minimum term to cover a new building or structure under construction or an existing structure undergoing additions, alterations, or repairs. Cancellation is allowed on a pro rata basis upon project completion; however, midterm cancellation will result in a short-rate penalty. A reporting form or renovations form allows coverage to be carried out according to the stage of completion (i.e., as more of the project is completed, more value is reported, resulting in the proper amount of coverage for each stage of construction).
Legal Liability or Fire Legal Liability – This covers your legal liability for loss or damage to the real and personal property of others as the result of your negligent acts and/or omissions. The loss or damage must be caused by a covered peril (including loss of use). The loss must be accidental, and the coverage most often is purchased for tenants in commercial buildings.
Building Ordinance or Law – Provides coverage if the enforcement of any building, zoning, or land use law results in loss to the undamaged portion of the building (Coverage A); demolition and removal costs of undamaged parts of the structure (Coverage B); or any increased cost of repairs or reconstruction (Coverage C). The replacement cost must be in effect for Coverage C to be applied.
Improvements and Betterment – Usually added by a lien holder. Covers all permanently installed improvements and betterment, which cannot be removed when a tenant vacates the building.
Glass – Basic specified perils for glass coverage include any resulting damage to other property from broken glass due to vandalism, and also vandalism to glass building blocks. Broad and specified perils cover $100 per pane of glass up to $500 per occurrence. A glass form must be added for scheduled glass coverage when there is a significant glass exposure to insure. The glass form includes the number of panes, dimensions, location, lettering, and ornamentation. A separate glass deductible may be scheduled as well.
Peak Season – An endorsement that provides additional limits on personal property inventory during a designated period of time. This is specifically used to cover fluctuating inventory values before and during peak shopping seasons.
Inflation Guard – Automatically adjusts the limits of insurance to keep up with inflation. The adjustment can be tied to the construction cost index in a regional area or a specified percentage per year. This endorsement can be very important in helping to maintain adequate coverage limits, which can protect against potential coinsurance penalties in a property loss.
Time Element – Insurance that covers other losses stemming from a direct loss by a covered peril to business property. Business interruption, extra expense, and loss of rent and rental value are the most common time element coverages. Business interruption coverage replaces lost business income after a covered loss. Certain key employees can be named, allowing the employer to continue to pay their salaries until the business restarts operations after a loss. Extra expenses can pay for office space, equipment rental, advertising, or most costs considered reasonable for keeping the company operating after a covered loss. Loss of rents and rental value cover loss of rental income to the property owner caused by damage or destruction of a building, rendering it unfit for occupancy.
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Without prior knowledge of inland marine insurance, it is easy to assume that this insurance line has something to do with boating transportation. In fact, inland marine insurance can cover a variety of transportation exposures; however, it does not cover boating transportation, which is covered under ocean marine insurance. Inland marine is a specialized type of property insurance that primarily covers damage to or destruction of your business property while in transport. Inland marine also covers the liability exposure for the damage or destruction that may occur to property in your care, custody, or control during transport.
Covered Causes of Loss
Standard perils in Inland Marine may include fire, lightning, windstorm, flood, earthquake, landslide, theft, collision, derailment, overturn of the transporting vehicle, and bridge collapse.
Coverage Forms and/or Specialty Coverages
Inland marine has great flexibility in covering many potential transportation risks. Some of the most common types of coverage offered are accounts receivable insurance, consignment insurance, equipment floaters (i.e., contractors' equipment), installation floaters, motor truck cargo insurance, trip transit insurance, and valuable papers (records) insurance. If you have questions regarding a particular business, then contact your broker-agent for further information.
Boiler and Machinery
Boiler and machinery insurance can add an important layer of coverage to an insurance policy. Boiler and machinery insurance is currently marketed under such names as "systems protector," "systems breakdown," and "machinery breakdown" insurance. Boiler and machinery insurance covers business property, other property losses, and legal fees (if any) that may result from the malfunction of boilers and machinery. Boiler coverage includes covering the costs of inspection and often maintenance of boilers. Machinery coverage can include many different types of machines used in retail, office, and manufacturing settings. Machinery coverage also includes major machinery systems common to most commercial buildings, such as heating, ventilating, and air conditioning systems. Since most commercial property policies exclude losses from boilers and machinery, it is important to be aware of any exposure your business may have and discuss it with your broker agent.
Crime insurance provides protection for the assets of your business including merchandise for sale, real property, money, and securities. It is considered a property insurance line. Based on the crime coverage that you purchase, it is possible to be covered for the following causes of loss: robbery, burglary, larceny, forgery, and embezzlement. Specialty coverage parts can be added based on need and exposure to loss such as mercantile open-stock, burglary insurance, mercantile robbery insurance, mercantile safe burglary insurance, money, and securities broad form policy, office burglary and robbery insurance, and storekeepers burglary and robbery insurance.
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EPIA inc. is a private Insurance Agency with no ties with legal entities. The information contained in this article is based on information provided by the Medicare Official Website.