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Insuring Your Business The Basics of Property & Liability Coverage A Publication of the Maine Bureau of Insurance Mila Kofman, Superintendent
Although Maine law does not require you to have property and liability insurance on your business, you may want to buy coverage to protect you, your property, and your financial investment. Without insurance protection, your business could face financial ruin either because of a property loss or due to a lawsuit. Although there are several types of coverage that a small business owner can or must purchase, like workers’ compensation insurance, this brochure describes only property and liability coverage. If you have questions about coverage, check with your insurance agent or call the Maine Bureau of Insurance at (800) 300-5000 (in-state) or (207) 624-8475.
Depending on the type of business, the best policy for you to buy might be a commercial package policy or a businsessowners (BOP) policy. With a commercial package policy you and your agent choose the coverages that you will buy, whereas a businessowner policy contains pre-packaged coverages.
Your property is the building and equipment that you own. Property insurance is one of the most important types of insurance that you can buy to protect the property, the inventory, and equipment used in running your business.
Basic Form or Named Peril – The “basic form” or “named peril” policy only gives you protection from events that are specifically listed in the policy. Examples of these listed events include: fire, hail, vandalism, windstorm, or sprinkler damage. Because this type of coverage is limited, the premium may be lower.
Broad Form – The “broad form” policy includes coverage listed in the basic form policy plus coverage for losses from additional perils such as collapse of roof due to weight of ice or snow, or damage caused by accidental discharge of water or steam. Again, the types of losses that are covered are specifically listed in the policy.
Special Form or All Risk – Contrary to its name, the “all risk” or “special form” policy does not actually cover all losses. The “all risk” or “special form” policy does not cover losses that are specifically listed as exclusions in the policy. Businessowner policies are generally written as special form or all risk.
Common Questions on Property Coverage
How is the Value of My Property Loss Determined When I have a Claim?
The amount payment you receive for your claim will depend on whether you bought replacement cost or actual cash value insurance.
Replacement cost pays the cost to replace or rebuild your property with materials of like kind and quality without deducting anything for depreciation. Replacement cost does not include the value of your land.
Actual cash value (ACV) is defined in Maine law as “the replacement cost of an insured item of property at the time of loss, less the value of physical depreciation as to the item damaged.” (Title 24-A M.R.S.A. § 3004-A). Coverage on an ACV basis pays the cost of damaged property or goods after deducting an amount for depreciation. On an ACV basis, the older the property, the less money you will receive when there is a loss.
Note: Do not confuse replacement cost or ACV with market value (the amount you paid for your property), appraisal, or assessment values. Insurance coverage is based on the cost necessary to fix or replace the property according to the terms in your contract. Property value as used in this brochure does not mean market value, real estate appraisal, or assessment value. How Much Property Insurance Should I Buy?
Most insurers require that you insure your property for a specific percentage of the replacement cost. This “coinsurance percentage” is stated in your policy and may affect the amount you receive for losses to your property. To have the full amount of a partial loss covered, you should buy coverage at least equal to the coinsurance percentage times the cost to repair or replace the property at the time of loss, as explained in the below examples. You must carry at least the required percentage or you will be responsible for paying part the loss out of your own pocket.
To receive full coverage for a total loss your coverage should be at least equal to the cost to replace the property at the time of loss.
Most insurers require that the amount of coinsurance on property be at least 80% of its replacement cost; however, some companies may require 100%. It is important that you know what the policy requires. The building value and business personal property/equipment values are separate limits with separate conditions. If your property is not insured to the percentage of its value that is required by your policy and you have a loss, the insurance company will apply a coinsurance penalty and you will not receive the total value of your loss.
Three factors affect how a coinsurance clause works:
1. The value of the property at the time of the loss.
2. The coinsurance percentage selected.
3. The amount of insurance selected.
The easiest way to think of how coinsurance works is through the following formula:
HAVE ÷ SHOULD x LOSS = the amount that the company will pay minus your deductible.
That is: You HAVE this much insurance. You SHOULD have had this much insurance based on the coinsurance requirement.
The resulting percentage in the above formula (obtained by dividing HAVE by SHOULD) is multiplied by the actual amount of the LOSS. The result is the amount the company will pay minus your deductible (which is the amount that you agree to pay before the company pays). Anything above this amount will be paid by you (the insured). The following examples explain how the coinsurance penalty works when a loss occurs.
Example 1 – Adequate Insurance
The value of your property (cost to replace) at the time of loss is $250,000
The coinsurance percentage required is 80%
The amount of insurance you have (HAVE) is $200,000
The deductible is $500
The amount of the loss is $40,000
Step 1: $250,000 x 80% = $200,000 – amount required by your policy (SHOULD)
Step 2: $200,000 ÷ by $200,000 = 1.00 (HAVE ÷ SHOULD)
Step 3: $40,000 (loss) x 1.00 = $40,000
Step 4: $40,000 − $500 (your deductible) = $39,500 In the above example you (the insured) are paid for the entire amount of the loss minus the deductible. The amount of insurance that you have meets the coinsurance percentage required by your policy; you are NOT a co-insurer because you kept your promise to insure for at least 80% of the value to replace your property at the time of loss.
Example 2 - Inadequate Insurance:
The value of the property (cost to replace it) at the time of loss is $250,000
The coinsurance percentage required is 80%
The amount of insurance you have (HAVE) is $100,000
The deductible is $500
The amount of the loss is $40,000
Step 1: $250,000 x 80% = $200,000 – amount required by your policy (SHOULD)
Step 2: $100,000 ÷ by $200,000 = .50 (HAVE ÷ SHOULD)
Step 3: $40,000 (loss) x .50 = $20,000
Step 4: $20,000 − $ 500 (your deductible) = $19,500 The insurer will pay $19,500 and you (the insured) become a co-insurer for the remaining $20,500 (i.e. $40,000 loss minus $19,500 insurance company payment = $20,500) because you didn’t meet the requirement of your policy to insure for at least 80% of the value at the time of loss ($200,000). Instead of having a policy for $200,000 of coverage, your policy was only $100,000, which resulted in you paying more out of pocket.
Example 3 - Over-insurance Whether you choose to insure your property on a replacement or actual cash value basis, it is important to keep your coverage current. Check with your agent yearly and whenever new property is added to make sure that your policy gives you enough coverage. You may be able to add a rider or endorsement to the policy that automatically increases your policy amounts to keep up with inflation. Remember, it is your responsibility to choose the right amount of coverage.
Some companies may offer a special loss settlement form which reduces the coinsurance amount to 70%, 60% or even 50%. This option is useful for older buildings, especially those with elaborate construction. In the case of a large loss, the special loss settlement form provides the cost of repair for partial losses when the owner will replace with lower cost, less elaborate construction following a large loss. Another option that may also be available is functional valuation coverage. This option does not change the coinsurance percentage, but instead determines replacement cost of a functionally equivalent building or repair/replacement using less expensive materials.
How do I Cover Loss to my Equipment?
Fixtures and permanently installed equipment and machinery may be covered as part of the building. Their value has to be considered when deciding on the limit of coverage for the building. This type of equipment includes fire extinguishing equipment, heating and air conditioning systems, refrigeration equipment, and permanently installed floor and window coverings.
Equipment that is not attached to the building or is used off the premises, such as contractors’ mobile equipment, is covered with an Inland Marine Contractor’s Equipment Floater. Other specific forms are available for Accounts Receivable, Camera and Musical Instrument Dealers, Equipment Dealers, among others.
Liability coverage protects you if someone is hurt while using your product or service or if someone is injured while on your property. Liability insurance can be important. A lawsuit could mean a large loss to your business. Consequently, you should carry enough liability insurance to protect your business from financial loss resulting from claims for injuries, deaths, or property damage that are caused by your products, business operations, or employees.
What Happens if my Policy is Cancelled or Nonrenewed?
Cancellation means that the insurance company is terminating your policy at some time between the effective date of your policy and its anniversary date. Nonrenewal is when the company decides that it will not continue your policy after the anniversary date of your current policy.
A company can cancel your policy for one of the following reasons:
If your policy has been in effect for 60 days or more when a notice of cancellation is mailed from your insurer you may request a hearing before the Superintendent of Insurance. You must request the hearing within 45 days of your receipt of the notice. A copy of the notice and a written request for a hearing must be mailed to Bureau of Insurance, 34 State House Station, Augusta ME 04333. Policies in effect less than 60 days when the notice is mailed or otherwise delivered do not have the right to a hearing, unless the policy is a renewal of a prior policy with that insurer.
A company may nonrenew your policy for any reason after giving a minimum of 30 days notice before the expiration date of the policy. If your policy has been nonrenewed, you are not entitled to a hearing before the Superintendent of Insurance.
Some Other Types of Insurance to Consider
There are other types of insurance coverage that are available to business owners besides the two types of coverages described in this booklet. Check with your insurance agent to choose the insurance coverage that best meets your needs.
Last Updated: January 2, 2009 |
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