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Posts|November 22, 2021

What Do You Mean I’m Underinsured?

By Jeff Cavignac
President CPCU, RPLU, ARM

This is one of the questions an insurance broker never wants to hear.

The purpose of property insurance is to protect what you own. If your business burns down or your property is stolen, you want to get a full recovery. If you are underinsured, you won’t.

Properly written property insurance policies are written on a Replacement Cost Basis. This means your property will be replaced with like-kind and quality without a deduction for depreciation. The policy however will only pay the cost to repair or replace the property subject to the policy limit. If for example, the cost to rebuild your building is $10,000,000 and you have a $5,000,000 limit, you will only recover $5,000,000. (Note that this discussion doesn’t delve into what is called “co-insurance”, if you have a coinsurance penalty provision in your policy, get rid of it).

Building costs have escalated dramatically in the past several years. Many people had their real property underinsured prior to the current supply chain issues we are facing. This has only made the problem worse. If you own Real Property take a hard look at your insurance limits. If necessary get an appraisal. The money you might save for having limits lower than your actual replacement cost pales in comparison to the loss you will suffer if your building is destroyed. The same goes for Business Personal Property and Contractors Equipment (Contractors Equipment is usually written on an Actual Cash Value basis which does take into consideration depreciation). Imagine that your entire facility is destroyed, what will it cost you to replace everything in it. If that were to happen, you will have enough challenges without having to worry about having enough insurance limits.

Business Interruption Insurance is even more challenging when it comes to setting appropriate limits. In simple terms Business Interruption Insurance is designed to leave you in the same financial position you would have been in, had there been no loss. It is recommended that you sit down with your insurance broker and discuss what would happen to your business if you suffered a major loss.

For whatever reason, people tend to underinsure their property. If you read this and you only take one thing away, it should be this: Make sure you are adequately insured.

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