Guest Post on Business Interruption

The following is reproduced from an article published recently, that was penned by my son Steve.

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It astounds me just how often I am confronted with businesses that have closed their doors after a seemingly small loss that was thought to be fully insured. I have found that the reason this occurs is because most business owners believe that their commercial insurance policies will apply to an insured peril, in the same way they apply to a home and contents policy.  That is, they believe they would be entitled to claim the full amount of the loss, up to the sum insured listed on the policy.  But commercial insurance policies are different.  They contain a clause called the ‘co-insurance’ or ‘average’ clause.

So what is “co-insurance” and what would be its effect to your final claim settlement in the event of a loss? I think that the best way to explain this is to use an example.

Let’s say you decide to take out an insurance policy on your business’s building and contents. Although the true value is $800,000 you decide to insure it for $400,000, because you “think” you know that you would never lose the entire building. Soon after, you have a small fire and the total cost of the damage comes to $200,000. No doubt you would think, “That’s OK, I have $400,000 cover and the loss is well within that, so I am totally covered – right?”  Wrong! The most you would be entitled to claim would be $125,000, less any excess or deductibles. This would mean that you, as the Insured would need to find the other $75,000 needed to effect repairs.

So why does the co-insurance clause reduce the size of the claim settlement by such a large amount? The clause effectively turns you, the Insured, into a part insurer.

In our example, because the business owner has only insured for half the true value of the building, the Insurer considers that it is, in effect, insuring only half of the building and the business owner, the other half as “co-insurers”.  Accordingly, in the event of a claim, the cost is split proportionally between the Insurer and the Insured.

Now I am sure you noticed that the insurer actually paid over half the claim in the above example. That is because, despite popular opinion, insurers are not all bad. Most insurers provide up to a 20% tolerance, as they know that it can be quite hard to estimate the true value of your businesses assets; whether it be due to the increasing price of building materials and labour, or because of a slight under-estimate on your part, and they don’t wish to penalise people who are actually trying to insure for the true value.

So the question a business owner should ask himself or herself is, if this were your business, would it survive a $75,000 uninsured loss? In most cases, I would say that the answer would be no. Remember if you want to avoid co-insurance you need to be fully insured.

In summary, I suggest that today may be a good time to review your insurance policies. Remember you are not only insuring the survival of your livelihood but also the lifestyles of your employees and their families.

Steve Manning – LMI Group

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Steve in the product manager for LMI BIcalculator and a Claims Executive in LMI Claims Services