A fire at a business can devastate a business. The structure may be damaged beyond repair. Business revenues are disrupted as the business cannot remain open. In the United States in 2006 there were 1.6 million fires reported resulting in $11.3 billion in direct property loss. It is a risk that must be insured against.
Most property insurance policies and business owner policies cover fire losses. Most business property insurance policies are broad form policies. These policies list a number of perils that are covered by the policy and exclude perils that are not covered.
However, fire insurance can be purchased as a specific peril policy or the coverage increased by a specific endorsement. It is important for the business owner to understand what is not covered under a traditional broad form policy and ways to increase coverage. It is important to review what are appropriate considerations when reducing premiums and what are not effective ways to save premiums.
Insure for the Proper Valuation
Many small business owners find that if they insure for an amount less than what the business is worth, premiums are lower. This is true. However, insurers require as a condition of the policy that the business is insured for a value equal to the actual value of the business. If it is not, and a loss occurs, a penalty is applied to the settlement amount. This penalty will almost always exceed the value of any saved premium and will come at a very bad time.
- Always insure for 100% of the business value.
- Have an independent evaluation of the business by an independent appraiser each year and adjust coverage as necessary.
- Do not rely on property tax evaluations or guesses from your insurance professional.
Actual Cash Value Versus Replacement Cost
Most policies cover a fire loss with actual cash value or ACV instead of replacement cost. Actual cash value pays the amount of the property less depreciation. This can be devastating if your business relies upon high value equipment that has a long useful life, but would be prohibitively expensive to replace. As examples: coolers, refrigerators, tow lifts, aircraft or anything that would be prohibitively expensive to buy new. Replacement coverage pays the amount to replace the property lost at whatever the replacement cost is today. Replacement coverage carries higher premiums and can be purchased as a rider or endorsement. Consider the following when considering ACV vs. replacement coverage.
- Your business may be underinsured if it cannot replace critical facilities and equipment at the depreciated value.
- Electronics such as computers frequently decline in real replacement cost such that actual cash value may be a better option.
- Property valuations are frequent causes of conflict between insurers and insured. You can avoid valuation problems by carrying replacement coverage.
Certain Property Needs Separate Coverage
Cash, valuable papers, certain types of inventory, some electronics, jewelry, and other items will require separate coverage or will be excluded from coverage. These are generally items that are impossible for the insurer to confirm and are prone to fraud.
Business Interruption Insurance
Fire insurance does not cover "downtime" for your business nor does it cover temporary relocation. Your business needs business interruption insurance to insure against the loss of revenue accompanying a fire and any potential relocation costs. Business interruption is a separate policy and should be considered if your business will be destroyed by being closed.
Coverage to Rebuild According to Current Building Code
Many businesses work in buildings or structures that are older than current building codes. In some cases, the structures are "grandfathered" in and do not have to comply with current modern standards. When a fire occurs the new construction must meet those standards. To the extent the insurer holds that such new standards are an improvement on the past structure, there is no coverage. If you have a historic building or do business in a rapidly changing area, you will want to make sure you have coverage to rebuild according to current building codes. This is often a separate endorsement or rider to the policy.
Other Points to Consider
You will want to review your policy annually. Make sure accurate addresses are reflected on the policy and all endorsements and riders. Sometimes if you own many buildings a blanket fire policy covering all of the structures can save significant premiums. Finally, always have a fire plan in place and train your employees appropriately. Insurers often provide discounts for active fire prevention programs.