7 Critical Areas That Need Review In Your Commercial Property And Liability Insurance Policy

by  Ed Sneineh, CLU, ChFC

Congratulations! You just received your new business policy by mail and you are happy that you feel more secured, have peace of mind, and you just saved some money over your prior insurance policy. Please, before you file your policy in the cabinet take a few moments to check the following 7 points. This can save you thousands, perhaps tens of thousands of dollars in losses or attorney fees. The real saving that you get with an insurance policy is not the reduction in the premiums. Actually the real savings come when you make sure that your policy is the 'right policy' for you, the one that fits your needs and budget.

Description of Operations: Check if the proper description of operations is listed in your policy. In some situations agents may forget to exactly describe the exact operations of your business, leaving your claims unpaid or delayed for a longer time. Examples of misdescribed operations include (1) failure to include operating a small restaurant with commercial cooking in a supermarket / C store, (2) failure to include live entertainment/ dance floor, if there are any, in a restaurant policy, or (3) failure to include roofing work for a construction contractor, so on.

Limits of Coverage & Deductibles
: Examine the amounts of coverages that you have on the policy with regards to the building, business property, liability, and any other coverage that you may have requested to have (professional liability, garage keeper liability, liquor liability, so on.) Also examine your deductibles and see if that is what you really applied for.

Coinsurance Ratio: One of the most misunderstood terminology in the insurance business is the coinsurance clause. Coinsurance clause in property insurance is meant to penalize policyholders who underinsure their property, regardless of why. If you have a business and you want to insure your inventory and fixtures at $540,000 when you really have $800,000 worth of inventory and fixture your company may under pay your future claims. The Coinsurance ratio is the percentage at which you must have property coverage compared to the replacement cost of that property, in order for the insurance company to pay you in full for your future claims. So if you have a coinsurance ratio of 90%, and your physical inventory and fixtures have replacement cost of $800,000 then you must maintain at least $720,000 [800,000 X 90%] if you want to be paid in full for your future claims.  Let's assume you only had  $540,000 property coverage on your policy, when you were supposed to have the  minimum of $720,000. This means that you only carried 75% coverage of the minimum that you were supposed to carry [540,000 / 720,000]. In that case, if you suffer a fire loss of $90,000 then your company will pay you only $67,500 [90,000 X 75%], without taking any account for your deductible which will also be deducted from the final figure paid to you.

Unlike health insurance where premiums go down with higher coinsurance, higher coinsurance ratio in property insurance means lower premiums because it's less advantageous to the policy holder.

Description of Covered Property: If your policy is supposed to cover certain property that you own such as business property, buildings, inventory, equipment or tools; you need to make sure that the property is accurately described in the policy. For example, if you are insuring a building that was built in 1965 with frame materials but your policy states otherwise you might need to check with your agent to see why there is a discrepancy. In some instances, your company might have given you a steep discount which you did not qualify for because of the year and the type of construction. This situation can complicate claim paying procedures especially if the claim is too large.

Premium Base: Premium base, when listed, shows the assumptions based on which the insurance companies charged you for liability. The most common three premium bases are (1) annual sales, (2) square footage of insured premises, or (3) payroll. Most retail businesses are charged based on annual sales. If you see that you premium base is $750,000 when your reported sales are $1,650,000 then there is a big discrepancy that may result in complicating your claims. In cases similar to the above situation your company can argue that you lied to them to get a lower  rate. Companies do have the right to audit your records, and charge you back for any un-charged premiums.

Effective and Expiration Dates of the Policy
: Examine these dates to make sure that there was no gape in coverage. Correcting dates can be easy in the beginning but may be impossible to do later. If you purchased insurance on January 15, but the policy came with an effective date of January 27, then you had two weeks without coverage. In most states your customers can sue you in 2 years after a particular accident. If something happened during the time, you may not be able to fix the error 8 months later when you receive documents from lawyers about an incident that happened on your premises on January 20.

Exclusions: Each policy has at least one section called Exclusions. There is no such policy that "covers everything". Reading the Exclusion parts will allow you to see if this particular policy does indeed exclude any part of your operations. If so, you have to review it with your agent. There could be two or more Exclusions Sections in your policy (one for property, one for liability, etc.) Read all possible Exclusions. Sometimes a standard Exclusions may be waived by an Endorsement, or an amendment to the policy that comes at the end of your policy packet. For example, Commercial General Liability does exclude professional liability. For a barber there needs to be an Endorsement at the end of the policy to add that professional liability coverage.