Expecting the Unexpected Part of the Unexpected

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ADJUSTING TODAY

Understand the valuation clauses of your insurance policy—and don’t rely solely on historical records for valuations. Also make sure that you understand the terminology used in the policy.

Actual cash value , for example, isn’t the cost to rebuild or replace the property: It’s that cost less depreciation (or it may be the market value , depending on the jurisdiction you’re in).

You can purchase replacement cost coverage, which would pay you the replacement cost of the property. However, almost all policies will compensate you for the full replacement cost only after you rebuild or replace.

On the same subject, in many cases you can replace the destroyed property with property of a different type and/or at a different location.

Remember, the policy will specify its limits on replacement. Know up front what your policy says because it could have a major impact on your operations later on.

Understand selling price clauses. Under some policies, if you lose your stock, you can collect most of the full selling price. Other policies reimburse you only for your costs, so you’ll need business interruption insurance to recover any losses in excess of your cost.

How will production continue in the event of a loss to your facility? Would your labor costs for employees be covered in such a situation? Often, these costs are not covered, resulting in the loss of a valuable workforce.

Other Points to Consider

In addition to knowing the true value of your property and business interruption exposures— from a claims perspective —allow for inflation and your company’s growth. If your policy was taken out two years ago, it was probably based on your earnings at that time. Today you may need more protection.

Be aware of any coinsurance requirements of the insurance policy which require you to carry a prescribed level of coverage or face a penalty at the time of a loss. Also, be careful of inventories that fluctuate widely from period to period, alternately peaking and diminishing.

A partial loss to stock can result in damaged products—carrying your label—being sold on the open...

“Make sure that you understand the terminology used in the policy. Actual cash value, for example, isn’t the cost to rebuild or replace the property: It’s that cost less depreciation.”


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