Frequently Asked Questions related to Personal and Business Insurance.
Q: What is Replacement Cost?
A: The cost, at the time of the loss, of a new article identical to the one damaged, destroyed or stolen. When the identical article is no longer manufactured or is not available, replacement cost shall mean the cost of a new article similar to that damaged or destroyed and which is of comparable quality and usefulness.
Q: How does Replacement Cost apply to buildings?
A: The replacement cost of a building would be the amount of money it would cost to repair or replace the building with similar material at today’s prices without depreciation, up to the policy limit.
Q: What is Actual Cash Value (ACV)?
A: For a building, this figure is determined as a replacement cost less depreciation. The calculation of the replacement cost is developed by building cost manuals which include the material and labor costs for construction in that geographical area. The depreciation figure that is subtracted from the replacement is based upon various depreciation guides and typically includes a visual inspection of the property. Factors that affect a building’s ACV include: year of construction, type of construction, repairs made to the building over its life, and the present condition.
For contents, ACV is the replacement cost less depreciation for the article that is damaged, destroyed or stolen.
Q: What is Liability Insurance?
A: The purpose of Liability Insurance is to provide personal liability and medical payments to others. The policy usually offers a minimum amount of $100,000 and maximum amount of $1,000,000. It includes the following coverages: damage to property of others, first aid expenses, and (personal liability) claim expenses. Liability coverage pays on behalf of the insured the sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage, to which the insurance applies, caused by an occurrence.
Q: What is Personal Articles Floater (PAF)?
A: Homeowners insurance is designed to cover general possessions, not valuable collections like antiques, jewelry and artwork. Most insurance companies limit their coverage of expensive possessions so that household premiums are more affordable to everyone. A homeowner’s policy lists the specific monetary limits for personal property under the section “Special Limits”. If the limits seem low to you, you may wish to schedule your valuables on a PAF. By providing your agent with an appraisal or a bill of sale for your valuables, you will be able to schedule that article. In the event of a loss, the article is replaced at the scheduled amount. Generally, no deductible is applied.
Q: What is a Personal Umbrella Policy?
A: It is an excess liability policy that provides coverage over your personal property, home, automobile, boat, motor cycle, etc. Generally, the policy limits are offered between $1 million and $10 million. The underlying insurance on your personal property must meet the specific guidelines set forth by the insurance carrier. Liability coverage pays on behalf of the insured the sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage.
Q: What are the essential coverages for small businesses?
A: All small businesses should have Business Owners / Package Policy, Workers Compensation, Auto, and Umbrella policies. A business Owners (or Package Policy) can provide special property coverage on your building, contents, business income and computers. It can also provide crime/fidelity and equipment coverage. The policy will include liability coverage for your premises, operations, product and completed operations tort liability exposures.
Workers Compensation: statutory limits for accidents, disease or illness which occurred on the job and are incidental to your job. Employers liability provides coverage for your company if a tort claim is presented for a job-related injury.
Auto: if necessary to cover both liability and physical damage for owned autos or trucks used in the business.
Umbrella: This is excess liability over and above your primary liability coverages. Limits are usually available to $5 or $10 million. Higher limits may be purchased at reasonable costs.
Other coverages to consider: Life, Accident and Health, Disability, Long Term Care, Retirement Plans, Dental Plans.
Q: I’m just getting my business started. Do I need insurance right away?
A: Yes, because the chance that you could suffer a loss begins with the first day of business. You can’t get help after the fact. If you suffer a loss and have no insurance or have improper or insufficient coverage, there is very little, if anything your insurance agent can do to help you. You must be prepared for the risks that are inherent in any business and the losses, sometimes catastrophic, that they can cause. Also, many states and local jurisdictions require the businesses be insured to begin operating. And if you rent space for your business, your landlord probably requires that you be adequately insured as well.
Q: Is insurance coverage different for different businesses?
It can be. Many small businesses are now insured under package policies that cover the major property and liability exposures as well as loss of income. A common package policy used by many small businesses is called the Business Owners Policy(BOP).
Generally, these package policies provide the small-business owner more complete coverage at a lower price than separate policies for each type of insurance needed. Your agent can help you decide which policy or policies are right for your business. Additional coverage for property, liability, or perils of conditions otherwise excluded (ex. Flood protection) can be purchased as endorsements to a standard policy or as a separate, second policy called a difference-in-conditions (DIC) policy.
Because businesses vary, it is impossible to have a standard policy to cover all contingencies. Also, for some businesses, regardless of their size, do not fit the profile of a standard business owners policy. For example, restaurants, wholesalers and garages have special liability needs that are not met in the standard business owners policy. Your insurance agent can advise you of the best policy (or policies) to protect you and your business.
Q: What types of property do I need to insure?
A: Your business may not possess all the following types of property, but you can use this list to make sure that you have considered all the property categories and any insurance coverage that may be warranted:
- Buildings and other structures (owned or leased)
- Furniture, equipment and supplies
- Money and securities
- Records of accounts receivable
- Improvements and betterments you made to the premises
- Data processing equipment and media (including computers)
- Valuable papers, books and documents
- Mobile property such as automobiles, trucks and construction equipment
- Satellite dishes
- Signs, fences and other outdoor property not attached to a building
- Leased equipment
To establish the amount of insurance you need on each, your insurance agent can help you review the types of property you own and their uses. Some of these items are covered in the basic policies. For others, coverage can be added by an endorsement, or rider. And some, like money and securities, may not be covered by a standard commercial policy and may require a second, separate policy.
Q: What types of property insurance should I consider buying?
A: The best thing to do is to take a complete inventory of all your business property, determine their value and decide if each is worth insuring. Then check to see that the items on the inventory list are included in the basic business property policy and covered for the correct amount. If not, ask you agent about the cost of purchasing additional coverage to meet your needs.
You also need to consider your business situation. Are you planning a major expansion? Does your inventory have a decidedly peak season (like a toy store in December)? Or does it fluctuate throughout the year (like a clothing store)? Is your liability limit high enough in light of the new job contract you just signed? Business policies are designed to be added to or subtracted from to meet your needs. Be sure to discuss changes to your business with your agent so that he or she can be sure your policy still provides adequate coverage.
Some Common additional coverage for business property include (this list is by no means all-inclusive):
Boiler and Machinery Insurance
Even if you do not own a boiler, you may need this coverage. The term “boiler and machinery insurance” is gradually being replaced with terms such as “equipment breakdown” or “mechanical breakdown” coverage. This insurance provides coverage against the sudden and accidental breakdown of boilers, machinery or equipment, including computer systems and telephones/communication systems. Coverage usually includes reimbursement for property damage, expediting expenses (ex. express transportation charges), and business interruption losses.
Builders Risk Coverage
Covers buildings in the course of construction. Depending on the policy, this coverage can be for either the building’s value at the time of loss or its full value at the time of completion.
Building Ordinance Coverage
Provides coverage when a community has a building ordinance stating that when a building is damaged to a specified extent (usually 50 percent), it must be completely demolished and rebuilt in accordance with current building codes rather than repaired. Special attention is required when establishing the amount of insurance.
Business Interruption Insurance
Covers the loss of earnings as a result of damage or loss of business property. Reimbursement for salaries, taxes, rents and other expenses plus net profits that would have been earned during the period of interruption can be included.
Commercial Crime Coverages
Covers money and securities, stock and fixtures against theft, burglary and robbery both on and off the insured premises and from both employees and outsiders.
Debris Removal Coverage
Covers the cost of removing debris after damage from fire or other covered peril that requires debris removal before reconstruction of the damaged building can being. This is not part of fire insurance coverage and must be added as an endorsement.
Covers business owners for losses due to dishonest acts by their employees.
Provides coverage for glass breakage such as store windows and plate glass on office fronts.
Inland Marine Insurance
Primarily covers property in transit such as from warehouse to warehouse or warehouse to retail store, as well as other people’s property left on your business premises, such as clothes left at a dry cleaning business or an employee’s personal effects left in the company locker room.
Insurance for Loss of Lease Income or Value
Covers the loss of income when rental property is damaged or destroyed and the loss of value when the owner of the rental property also used some of its space for business. If the tenant of the destroyed or damaged building is forced to rent space elsewhere at a higher cost, this is called loss of lease value.
Q: Who decides how much my business property is worth?
A: Property insurance can be purchased on the basis of the property’s actual value, on its replacement cost or on an agreed amount. The differences between the three are:
Actual Cash Value
The replacement cost of the item minus depreciation. For example, a new desk may cost $500. If your 7-year-old desk gets damaged in a fire, it might have depreciated 50 percent. Therefore, you would be paid $250 for it.
The cost of replacing an item without deducting for depreciation. So today’s cost for a desk of a size and construction similar to the 7-year-old one damaged by fire would determine the amount of compensation. If it costs $500 today, that would be the replacement coverage.
Art objects, antiques and other unique items are usually insured at an amount agreed upon when the policy is being written. An appraiser values the goods to be insured and the business owner and the insurer agree upon an amount that the insurer will pay if the goods are destroyed due to a covered peril.
Check your policy. If you prefer replacement coverage and do not already have it, this coverage can be added to your policy. Inflation-guard coverage, which automatically increases your insurance amount a certain percentage, protects against rising construction costs. Your agent can advise you of the costs involved.
Q: What kinds of events does business insurance cover?
A: Basic property insurance policies generally cover losses caused by fire or lightning and the cost of removing property to protect it from further damage (ex. Removing inventory or equipment form a damaged building so it won’t be stolen). “Extended perils,” including windstorm, hail, explosion, riot and civil commotion, and damage caused by aircraft, automobiles or vandalism are usually covered in a standard policy. Other important perils, often not covered and considered “optional” in almost all standard policies, include earthquake and flood damage, building collapse, and glass breakage. Property insurance can be written as either “named peril” policies or so-called “all risk” policies. A named peril policy provides coverage for those perils specifically named in the policy. An all risk policy covers loss by any perils will be covered and, to avoid confusion, is often replaced with the term “special form” or “special causes of loss” coverage. Check with your agent on the perils covered by your policy. If you wish, additional coverage can be added.
Q: Everybody seems to be suing everybody else these days. What if someone sues my business?
A: No business can afford to be unprepared for a lawsuit. Liability insurance protects your business assets when the business is sued for something the business did (or failed to do) that contributed to injury or property damage to someone else. Liability coverage extends not only to paying damages but also to the attorneys’ fees and other costs involved in defending against the lawsuit – whether valid or not. The standard business owners policy provides liability coverage, as does a separate policy known as a commercial general liability (CGL) insurance policy. Generally, commercial liability insurance, whether purchased in a separate policy or as part of a standard business owners’ policy, will cover bodily injury, property damage, personal injury or advertising injury. The medical expenses of a person or persons (other than employees) injured at the business or as a direct result of the operations of the business are also covered.
Usually excluded from both types of liability insurance policies are suits by customers against a business for nonperformance of a contract and by employees charging wrongful termination or racial or gender discrimination or harassment.
Check with your agent about the best liability protection covering all types of situations that may arise in your business.
Q: Will I need to protect my employees in the event they are injured on the job?
A: Yes, and in most states there are legal requirements that must be met, and for which you may be responsible. State laws vary, but most states require that you carry some form of workers compensation insurance. This protects the employee and also offers you the business owner a degree of immunity from lawsuit by an injured employee.
Q: I keep one auto strictly for business. Do I need a separate policy?
A: Yes. Whether you have one vehicle or several, you will need a business automobile policy. Such a policy covers any motor vehicle used in your business including cars, vans, trucks and trailers pulled by trucks, and offers coverage if they are damaged or stolen. It also covers liability if the business vehicle is in an accident and the driver is at fault. This policy is not for truckers or commercial garages. They have special liabilities and must secure special policies that deal with their different needs. Businesses that have a fleet of vehicles will of course have different needs than a business with one or two, and their policies will reflect these differences.
Q: I work out of my home. Will my homeowners insurance cover my business?
A: Yes, but on a very limited basis. Loss of business property is usually reimbursed up to $2,500 in the house and up to $250 for business property damaged or lost away from the premises. Even if your business is a sideline such as a craft studio, these limits may be too low to cover all the equipment and materials you have accumulated. It’s also important to know that no business liability coverage is included in a standard homeowners policy. Your insurance agent can help you ascertain what, if any, additional coverage you need. This additional coverage may be added to your homeowners policy or found in a separate commercial policy.
Q: What is coinsurance all about?
A: Most business policies include a “coinsurance” clause stipulating that a percentage of the total value of your property must be insured in order to be fully reimbursed for a loss, even a partial one. (Most losses are partial). If you insure for less than that amount, your insurance company may impose a “coinsurance penalty” on your claim.
Here’s how coinsurance works:
Let’s say you have a building insured that you believe would cost $100,000 to replace and a coinsurance penalty in your policy of 80 percent. You insure the building for $80,000, thinking you have fulfilled the coinsurance clause. A fire loss causes $60,000 worth of damage, so you submit a claim. Your insurance company subsequently determines that the replacement cost of the building is actually $150,000. To determine how much to pay on the claim, the insurer divides the amount of insurance you purchased ($80,000) by the amount you should have purchased (80% of $150,000 or $120,000). The result (two-thirds, or $80,000) is the amount of your claim the insurer will pay.
Thus, even for a partial loss within the monetary limits of your policy, you will receive only two-thirds of the amount claimed. If the building had been insured for at least $120,000, the insurer would have reimbursed you for the full amount of the loss.
You should check with your agent to make sure you have adequate coverage. Adding an endorsement to the policy that automatically increases policy limits to keep pace with inflation is a good idea.
Q: Can I do anything to lower my insurance premiums?
A: Remember that all insurance premiums are based on the risks involved. The insurance company evaluates the situation to determine the risks – or potential for losses – and bases its rates on the results. Therefore, deliberate steps you take to lower your risks not only can help safeguard your business but also may make you eligible for lower insurance rates. Consider these steps:
- Maintain adequate lighting throughout your business premises.
- Keep electrical wiring, stairways, carpeting, flooring, elevators, and escalators in good repair.
- Install a sprinkler system, smoke and fire alarms, and adequate security devices.
- Keep only a small amount of cash in the cash register.
- Keep good records of inventory, accounts receivable, equipment purchases and the like. Consider keeping a second set of records off-site, such as with your accountant, insurance agent, at home or in a safe deposit box at your bank.
- Make sure your employees have good driving records.
- Make sure your employees know how to lift properly and use all necessary safety equipment, such as goggles, gloves, and respirators.
- Consider using the services of a risk manager. Such an outside consultant can advise you of any safety or environmental regulations you may have overlooked or not been aware of and talk to your employees about safety practices.
- You may also wish to raise your deductible where appropriate to lower your insurance premiums. How high to raise the deductible should be governed by how much you can afford to pay out of pocket. Be careful not to raise it so high that you cannot cover it should a loss occur.
- Finally, make sure your agent is familiar with your business and the risks inherent in it. He or she should be able to advise you on risk management techniques and their benefits to both you and the insurer.
Q: What should I look for in an agent?
A: Agents are there to help you. At the most basic level, any agent should be able to answer all of your questions about insurance, provide you a thorough assessment of your insurance needs, and offer you a choice of insurance products to meet those needs. Also, any insurance agency should provide you with prompt, quality service in the case of a claim.
Just as important is the level of professional confidence and personal comfort you feel with the agent. Many people stick with the same insurance agent for decades, even generations. It helps to find an agent you can get to know and trust.
An important, but sometimes overlooked, factor to keep in mind is that there are two kinds of insurance agents: those who represent only one insurance company and those who represent more than one insurance company.
Agencies offering only the policies of one insurance company often are referred to as “captive agents,” because the company they represent does not allow them to offer their customers competitive alternatives.
By contrast, agencies offering the policies of more than one insurance company are called “independent agents,” because they can shop around for their customers for the best insurance values among a variety of competing companies. Lake Central Insurance Services is an independent agent.
A nationwide survey in 1994 showed that Americans prefer to work with independent insurance agents by a 2-to-1 margin over captive agents. You can be sure you are dealing with an independent agent when you see this symbol
on the agent’s signs, letterhead and business cards.
Notice: Products of Lake Central Insurance Services and Lake Central Investments are NOT insured by the Federal Deposit Insurance Corporation (FDIC) or any other agency of the United States.