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Don’t be a cheapskate and underinsure your property

Broke Now, I don’t want to be redundant or beat a dead horse so to speak. However, in light of the recent flooding in Iowa and the fires in California, it still surprises me when I hear about people who did not have enough coverage on their property.

In the business arena, most insurance carriers require that a policyholder have their property insured for at least 80% of the value.

What I see in the market is that business owners will often insure their buildings for the amount they owe on it. Maybe they negotiated a good price or purchased a foreclosure and got it for under the assessed value.

Then they insure the building for what they paid for it instead of what the property is worth or what it would cost to replace it.

Why not?

They don’t have much invested in it and what do they have to lose if it burns down? They got a good deal on it. Well, in the event of a loss, the business owner is faced with an underinsurance issue.  This can be a substantial cost to the business owner should a loss occur.

Let’s do some simple math …

  • You have a building that is worth $150,000
  • There’s a fire and the cost to repair is $40,000
  • The building is insured for $105,000
  • Your deductible is $500

Well – the minimum amount of insurance to meet your coinsurance requirement is: $150,000 x 80% = $120,000

Looks like we have a problem since you currently only have coverage for 70% of its value ($105,000).

Now what does that mean for the $40,000 loss?

Well, it means that the insurance company is only going to pay 70% of that amount - $40,000 x 70% = $28,000 less your deductible $500 = $27,500.  So who is going to have to pay the remaining $12,500 worth of repairs?

Well, the answer to that is the business owner. Ouch!

How can this be avoided? It’s really just some common sense and a little bit of time.

  • Make sure that you visit with your insurance agent at least annually.
  • Be informed. Be proactive. This is your business - your bottom line.
  • Ask questions to ensure that you understand the coverage on your policy.

Often times, I talk with business owners and they have no idea how the amount of coverage they are carrying was derived. They are also not aware of the coverage they have and/or what it means.

They are mainly concerned about the cost of their premiums.

Now, I completely understand the economy we are faced with today. We are all trying to save as much as we can one way or another. However, this is a large price to pay to try and save a few dollars off your premium should this loss happen to you.


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