This question has been the root of more discussions in the property insurance industry than you can imagine. Property insurers are focused on making sure that building valuations are current and meet their requirements. There are a number of tools available for use by insurers. Our article on Insurance to Value discuss the process and the data used. We identified in our article on that values were going to be a key evaluation point for carriers.
The second part to your property insurance program is the value established for Business Personal Property which includes all the contents of your building. There are no recognized tools for setting these values which often leads to insurance limits that do not reflect the true value of your business contents. Here are some thoughts to consider when evaluating the limit you choose for contents coverage.
Asset Log Data
Many firms have an asset log used to calculate depreciation on equipment, tools, and fixtures. This is an excellent starting point for identifying the items that need insurance. The question is are the values you report to the insurance company the actual replacement costs or the depreciated costs? If the terms of your policy are replacement cost coverage, the value should be replacement cost. If you have a policy with actual cash value terms, then the depreciated values are probably accurate.
Recognize the limitations of your asset tracking system. Some firms establish a minimum value to report on the asset log. Items below this value are not in the system. This may leave a large number of items that are not on your asset log.
Contractual Obligations
If you take on the care custody and control of customer goods, fixtures, tooling, or raw materials, you may have a contractual obligation to provide property insurance for these items. This value should be shown as “Property of Others” on your insurance policy. Read your contracts carefully to see if there are specific deductible or coverage form requirements. In some cases, it is easier to have these values on a separate property floater so you can easily track the costs and manage any schedule of values related to these contractual requirements.
A second source of insurance obligations can be your leasing or renting equipment from others. These contracts typically require insurance protection for the leasing or rental agent.
Replacement time frame
The time it takes to replace items should be considered during the review of your contents. This can be a factor in determining your exposure to business interruption if key equipment has a long replacement time.
Would you replace existing equipment with the same type, or would you change to an alternate technology? Some firms believe that the replacement equipment will be less expensive, so they can carry a lower value. This may work for a total loss, but most losses are partial losses so the equipment would be repaired versus replaced. If you choose not to repair the damaged equipment, you’d only receive an actual cash value settlement from the insurer. This depreciated amount should be compared to the cost of the new technology.
Contents Creep
Most firms acquire their business personal property over time. While large purchases make the asset log and depreciation schedule, many items are added, and no formal reconciliation is done to catch those values. Doing an inventory of your contents is a significant investment of time and effort. We suggest that you do this process on a scheduled basis at least every five years. This allows a reasonable time frame for additions and deletions to be in the memory banks.
If you are new in business this is more important as your business personal property may grow every year. Also consider equipment and tools that are off premises at job sites or on or in vehicles. Equipment that is assigned to remote workers should also be considered. You may need a floater policy to cover values that are away from your premises.
The Driehaus Difference
We want to be sure you have the right coverage, the right values, and the right forms for your insurance program. If you are not knowledgeable in the difference in valuation clauses, location versus floater policies and loss settlement clauses you need an experienced insurance expert to guide you. Our staff has decades of experience, and we want to share our knowledge and expertise to make your insurance program the best fit for your business. Contact us by calling our office at 513-977-6860 or use any of the contact tools at www.driehausins.com