Insurers are in the unique position of having encyclopedic information about the many different ways your business property could be damaged or destroyed, from fire and flooding to embezzlement. Property is also vulnerable as a result of a variety of other events, such as electrical surges, accidental activation of a chemical sprinkler system or a computer virus.
Because insurers know so much about what can go wrong, they can provide your business with the insurance coverages your particular type of enterprise requires. Without appropriate insurance, property losses can easily cause the entire enterprise to fail.
The purpose of property insurance for the small business is to provide critical financial assistance in the event of a loss so that the enterprise can continue to operate with as little disruption as possible.
Property insurance alone is seldom enough, however. It should be but one part of an overall risk management and disaster recovery plan. On average, businesses that devote resources to risk reduction and risk control have fewer insurance claims. These firms generally have more insurers competing for their business, so that they are able to find coverage more easily and often at a lower price than enterprises which have more losses.
We cover here, in a general way, many of the more common types of property coverage. You can obtain full information about your particular policy by reading the policy itself and discussing your coverage needs with your agent or insurance company.
Insurers offer small business owners a huge variety of property insurance policies. There are policies that cover only a single peril or cause of loss, such as a fire insurance policy, a crime policy or an electronic equipment policy. The particulars of the policies vary from insurer to insurer.
And there are policies that include several different coverages in a single “package.” The majority of small business owners find it more convenient and economical to purchase a package policy which provides protection against many types of loss in a single policy. Insurers may create their own insurance policies. Many rely in part on a policy format from ISO. This policy is generally referred to in the insurance industry as the businessowners policy (BOP), The discussion here is based on provisions of the 2004 revision to the BOP.
The BOP covers any buildings the business owns and much of the property needed to run the business.
Specifically, the policy covers:
- Buildings as named in the policy Declarations, generally the first pages of the policy. Structures are covered as well as permanently installed fixtures, machinery and equipment; outdoor fixtures; items you use to maintain or service the building, such as appliances; and additions under construction. To keep up with the increasing cost of rebuilding, the policy’s limit of insurance for covered buildings will automatically rise by a set percentage each year. Alternatively, you can choose to insure buildings for their full replacement cost. Be sure to discuss with your agent whether you should purchase the standard building coverage or replacement cost coverage.
- Building Contents, although there are a few exceptions. The policy covers most property on or near the business premises that is used in the business. This would include such things as machinery, computers, raw materials or inventory. You also have coverage for any leased property, which you are contractually obligated to insure.
- Property of others that is in your care, custody and control to the extent you are legally liable for that property. This coverage is particularly important to a business, such as a computer repair shop, that earns revenue from servicing property of others.
If your business rents or leases its premises, your lease should describe your obligations with respect to insurance. If you are the sole tenant, you may be responsible for insuring the building. You may be responsible for continuing to pay rent even if the building is destroyed. Should a fire destroy the building, will the landlord or the tenant be responsible for debris removal? You may want to review your lease with your insurance agent to be sure your property insurance covers your obligations.
For those who rent, the BOP provides coverage for tenant’s improvements and betterments. These are fixtures, alterations, installations or additions that you have put into the space that cannot legally be removed from the landlord’s premises.
Insurance contracts always describe in some way the perils being insured against. One way of writing the BOP is to name the covered causes of loss. Another is to use what insurers may call the “special form,” which states that all causes of loss are covered except those that are excluded by name.
In the BOP format that names covered causes of loss, those included are fire, lightning, most explosions, windstorm or hail, smoke from accidental fire, aircraft or vehicles (not including those owned or operated by the business itself), riot or civil commotion, vandalism, automatic sprinkler leakage, sinkhole collapse, building collapse, volcanic action and certain types of damage from water or other liquids.
A number of events that can cause property loss are not covered by the basic BOP.
There are a variety of reasons. Some causes of loss, such as employee dishonesty or breakdown of a steam boiler, are excluded from the basic BOP, but you can add coverage to it by payment of an additional premium. Some events, such as wear and tear, aren’t covered because they don’t meet the basic criteria for insurance of being accidental and unpredictable. (Regular maintenance of property is your responsibility.) Coverage for other events, such as flood and earthquake, aren’t needed by all businesses. Separate policies are available. Nuclear reaction and war are considered to be uninsurable, since insurers cannot predict with any degree of accuracy the frequency of such events or amount of damage likely to occur.
The following are some of the other events that can cause damage that are usually excluded from the basic BOP: power failure (except when it causes loss or damage to computers and electronic data); failure of computer hardware or software; robbery and burglary; most instances of pollution; and changes in humidity or temperature. Also excluded is coverage for missing property where there is no physical evidence to show what happened to the property, such as with a shortage discovered after taking inventory.
Be sure you understand what causes of loss are and aren’t covered by your policy. Discuss with your agent the extent to which your business risks a loss from any of these events and whether you should purchase coverage for these particular risks if it is available.
The basic BOP excludes some types of property from its coverage. For many of these items, such as money and securities or outdoor signs, insurance is available as an addition to the BOP by paying an additional premium. For items such as motor vehicles or boats, however, you will need to purchase a separate policy. Excluded property usually includes:
- any vehicles subject to motor vehicle registration, including aircraft, autos and trucks
- bullion, money or securities
- land, water, growing crops, lawns, trees, shrubs or plants
- outdoor fences and signs not attached to the building
You should discuss with your agent what property is and isn’t covered by your policy, as well as whether you may need to purchase additional coverage for some types of property excluded from the basic coverage. Since most businesses, for example, own or use vehicles, they should consider business automobile insurance.
Coverage for pollution is limited to cleaning up pollution that was caused by a covered cause of loss occurring during the policy period. For example, if vandals opened drums of a toxic chemical and poured it on the ground, the insurer would cover the cost of the clean up (up to the policy limit), since vandalism is a covered cause of loss. On the other hand, if the toxic chemical slowly leaked into the ground because the drum was defective and had a tiny hole in it, you would not have coverage under the BOP. A defect in the drum is not a covered cause of loss under your property policy. (For help with cleanup costs in this hypothetical situation, you might find compensation from the liability insurance of the drum manufacturer or seller of the chemical.)
If your main business premises are destroyed along with much of the property you used to operate, this loss, though devastating, may be only just one part of the total.
Every day you are unable to operate is a day of lost income, for you personally and for the business and of lost business opportunity. If the property damage or loss prevents you from providing products or services to your customers or clients, they may go elsewhere and many of them may never return. If you are to keep your employees, you must continue to pay their wages even when the business is generating much less than normal income. It is little wonder that most businesses which lack insurance to cover these potential ongoing economic effects of a serious destructive event are unable to survive. Research by the Institute for Business & Home Safety shows that at least 25 percent of those businesses that close following property loss events never reopen.
Prudent businesses have disaster recovery plans that include insurance to cover lost income and extra expenses that result from a covered loss.
Because coverage for lost income and extra expenses is so important to continued business survival, it is part of the standard BOP. The policy covers actual loss of net business income that would have been earned had it not been necessary to suspend operations due to a covered cause of loss. The policy also covers continuing normal operating expenses, such as utility payments and payroll.
The insurer will pay, as well, extra expenses that you incur to avoid or minimize suspension of operations. Such extra expenses often include costs to relocate, to equip and to operate a replacement premises, as well as expenses to repair or to replace property and to restore lost information on damaged valuable papers and records.
Generally, these coverages are triggered only when you have a direct loss from a covered cause of loss. If the cause of loss is an earthquake, there will be no coverage. If your business must be closed due to someone else’s loss, there is no coverage. For example, your business could be an accounting firm located on the third floor of a large building. If there is a fire on the ground floor of the building, which does no damage in your office but causes the building to be shut down for repairs for a month, your BOP would not provide coverage for lost business income and extra expenses, since you did not have a direct loss yourself.
Your business may be one of the many that experiences seasonal variations in the value of inventory, raw materials and other items. A complete loss at the height of the summer if you sell ice cream or during the winter holiday season if you have a retail operation may be several times larger than during the rest of the year. To protect against a loss in the busy season, the BOP provides for an automatic 25 percent increase in your policy limit for business personal property. The seasonal escalator applies only if you have insured your business personal property to at least 100 percent of your average monthly values during either the 12 months preceding the loss or the period of time you have been in business as of the date of the loss, whichever is less.
The BOP includes numerous other coverages to protect your business from a variety of accidental events that could wreck havoc on your financial well being. These include:
- Actions of Civil Authorities
- Bogus Money Orders and Counterfeit Money
- Business Income from Dependent Properties
- Computer Operations Interruption
- Debris Removal
- Electronic Data Loss
- Expense to Preserve the Value of Property
- Fire Extinguisher Recharge
- Forgery or Alteration
- Fungi, Rot and Bacteria
- Window Glass Breakage Expenses
Actions of Civil Authorities – Sometimes physical damage to property other than your own leads the police or other civil authorities to prevent you from having access to your own premises. If the loss at the other property is due to a cause covered by your policy, then the insurer will pay for your actual loss of business income and any necessary extra expense caused by the action of the civil authorities.
By way of example, assume you own a hair salon. An explosion has significantly damaged other businesses near you, although your own premises suffered no physical damage. The police close off the whole block for a week, preventing your business from operating from that location. Your insurer will cover your lost income and extra expense caused by this action.
Bogus Money Orders and Counterfeit Money - Should your business make the good faith mistake of accepting bogus money orders or counterfeit money, the insurer will pay up to $1,000 to cover the loss.
Business Income from Dependent Properties – This coverage applies when your business is dependent on another operation and the other operation is unable to conduct its usual business because it has been damaged by a cause of loss that is covered by your policy. Should you suffer a loss due to such damage at the premises of a business you depend on (“dependent property”), the insurer will pay for the actual loss of business income you sustain. This coverage may also be called contingent business income (also often referred to as contingent business interruption).
For example, you’ve designed a new type of folding beach chair and you have many orders to ship it in time for the summer selling season. Your chairs are manufactured at the Contract Furniture Factory (CFF). Due to damage from a fire, CFF is unable to make your chairs. Should neither you nor CFF have a backup manufacturer who can fulfill the contract, you will lose income from the orders you could not ship. Your insurer will pay for the net income loss you suffered as a result. If, however, damage at CFF is due to an earthquake and you don’t have earthquake insurance this coverage will not apply since the damage at the dependent property was not due to a covered cause of loss.
Computer Operations Interruption – Should computer operations be interrupted due to a covered cause of loss, your insurer will pay (up to $10,000) for business income lost and extra expenses incurred as a result of the computer problem. In addition to other causes of loss, this coverage applies to a loss caused by a computer virus, harmful code or other harmful instructions entered into your computer system or a network to which it is connected. There is no coverage, however, for loss or damage caused by the actions of any employee, including temporary or leased employees or by anyone you hire to work on your computer system.
Debris Removal – When a building is destroyed or damaged by fire, wind or other peril, debris is left which must be removed before reconstruction can occur. The business policy, within certain conditions, covers the cost of removing debris left behind as a result of a covered cause of loss.
There is an extra $10,000 of coverage for debris removal should the limit of insurance be reached before debris removal has been factored in.
Electronic Data Loss – In the event electronic data is destroyed or damaged as the result of a covered cause of loss, the insurer will pay the cost to replace or restore it. Causes of loss that apply to this coverage include a computer virus, harmful code or other harmful instructions entered into your computer system or a network to which it is connected. The coverage applies as well to threats by cyber extortionists who threaten to bring your computer system down with a code or virus if you don’t meet their demands. There is no coverage, however, for loss or damage caused by the actions of any employee, including temporary or leased employees or by anyone you hire to work on your computer system. (Negligent work by third parties should be covered by their liability insurance.)
Expense to Preserve the Value of Property – To preserve the value of property, it may be necessary to move it from the insured premises to another location. For example, if a major storm is predicted and your building has no basement, you may want to move some of your high-value inventory to a location where there is a basement. The property policy covers such property while it is being transported and for up to 10 days after it is moved to the alternative location.
Fire Extinguisher Systems Recharge Expense – If your fire extinguishing system is discharged (other than during installation or testing), the insurer will pay to have it recharged or replaced, whichever costs less.
Forgery or Alteration – The insurer will pay up to $2,500 (unless you buy a higher limit) for losses resulting directly from forgery or alteration of any chec