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(Photo credit: Alan Cleaver)

Property insurance is an important but often overlooked component of your total insurance package. Whether you are a business owner or independent contractor, it is likely that you have made a considerable financial investment in furnishings, equipment, supplies, and inventory. The following discussion of insurable interests, property valuation, coverage forms, and deductibles will help you to understand the process of and coverage provided by a property insurance policy.

When purchasing property insurance, you must have an insurable interest. This means that you would stand to lose financially if the property was lost, stolen, damaged, or destroyed–you must own or lease the property in question. For example, a salon owner may purchase coverage for the equipment, fixtures, and supplies which they own or lease. This coverage will not apply to equipment or product owned by employees or independent contractors. In the same manner, you cannot purchase building coverage unless you are the building owner.

Once an insurable interest is established, carefully consider the value of your property. Take a few moments (or hours) to take a written inventory of everything–include any fixtures you’ve installed or improvements to the premises you’ve made, product inventory, equipment, supplies, windows, mirrors, and signs. To be properly protected, it is imperative that your business is fully insured. A long-time client recently found out the importance of being fully insured. When she opened her electrolysis clinic over twenty years ago, $2,000 was sufficient to cover her machine, lamp, and chairs. Unfortunately, we were not notified of a series of renovations or of the purchase of additional furnishings and equipment. When a fire completely destroyed her premises last year, a $2,000 check from the insurance company could do little to rebuild her $40,000 clinic. Fortunately, our client was able to obtain loans and re-open for business. Her clinic is now fully insured.

Policies will provide either Replacement Cost (RC) or Actual Cash Value (ACV) coverage. Replacement Cost coverage provides full replacement cost (limited by the amount of coverage purchased) of your business property. If a five year old computer was stolen, you would be reimbursed for the cost of a new computer of “like kind and quality”. Actual Cash Value coverage will pay the current value of business property less depreciation. If the same five year old computer was stolen, you would be reimbursed for the original purchase price of the computer less depreciation. As you can imagine, Actual Cash Value coverage is generally less expensive than Replacement Cost. This cost savings is usually not sufficient enough to warrant the reduction in coverage.

Property coverage is available in either Special (Deluxe) or Basic (Broad) form. Basic form coverage will protect your business property against “covered perils” including fire, lightning, explosion, windstorm or hail, smoke, aircraft or vehicles, riot, vandalism, sprinkler leakage, and sinkhole collapse. Vandalism coverage will not apply to glass or signs unless you purchase specialized glass or sign coverage. Special form coverage will also include coverage for burglary and theft of money (on and off premises) and business property while Basic form coverage does not. As with ACV and RC property valuation, less coverage (Basic) is less expensive. Burglar alarms and other protective devices can help to reduce property insurance premiums. It is advisable to consult your insurance agent regarding which option is best for your individual situation.

Deductibles are an important factor to consider when purchasing insurance. A deductible is the amount you would pay out of pocket in the event of a loss before the insurance company would step in. For example, if your policy includes a $250 deductible and a $2,000 electrology machine was stolen, you would be responsible for the first $250 and the insurance company would pay the remaining $1,750. Lower deductibles will slightly increase policy premiums while higher deductibles will slightly decrease policy premiums. We have found in many cases that any cost savings afforded by higher policy deductibles are not sufficient enough to warrant the reduction in coverage. Ask your insurance agent for a cost comparison with different property deductibles–the actual effect on policy premiums will vary significantly between insurance carriers.

Many property insurance package policies (a.k.a. Business Owner’s Policies) also include coverage for Business Income and Extra Expense. Business Income coverage protects you against the loss of business income in the event of a loss due to a “covered peril” (fire, explosion, windstorm . . .). Extra Expense coverage provides coverage for the additional costs incurred to remain open for business or to expedite reopening your business. For example, in the event of a fire Business Income coverage would reimburse your loss of income for the period of time (often up to 12 months) to either rebuild or relocate your business. Extra Expense coverage would include the cost to rent equipment (or a generator) or to move your equipment and supplies to a temporary location. Both Business Income and Extra Expense coverage are written with a limitation of both time and amount. Coverage could be provided (for example) to cover the actual loss of income for up to 12 months, or up to $5,000 for up to 3 months. Your coverage needs will be determined by a number of factors including your annual sales and the ease of relocation. The long-time client mentioned above was able to collect under the Business Income part of the policy. This enabled her to concentrate on rebuilding her business without spending time looking for temporary employment.

The complete protection of your business assets is of critical importance. Property coverage is a significant element of this protection. A clear understanding of your coverage needs will guide you through the purchasing process and help you to communicate your needs to your insurance agent. Knowledge is the best protection. The insurance agent chosen can be as important as the coverage selected. it is important to work with a licensed insurance professional who is qualified in their field, knows the industry, and represents “A” rated insurance companies. Since each business is unique, the agent must understand the services provided and the needs of each particular business. Do not be afraid to ask questions; about the policy being purchased, the qualifications of the agent and rating of the company. Be aware that often a lower price does not determine the best deal. As with any other major purchase, be sure to be an informed consumer. Speaking with other professional in the field, seeking information from trade associations and reading trade publications will help to determine the questions to be asked and help with references.

(originally published in Skin Inc magazine)

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