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Accurate Insurance Valuation: Must-Know Tips for Complete Business Coverage

If you’re like many small and medium size businesses, your company has probably changed and evolved since you first purchased your business property insurance policy. Maybe you’ve added to or changed your space. Perhaps you’ve moved. Or added another location.

In any of these cases – or even if you’ve simply maintained the same space for a number of years – it’s a very good idea to have your property reviewed, so your insurance is based on an accurate valuation if you need to file a claim following a fire, flood or other catastrophe. Having a current valuation is a critical part of any business disaster recovery planning effort.

“We know that it’s your job to keep your business running and make a profit,” says Nationwide agent Tim Morehead, owner of the Morehead Agency, LLC of Lewis Summit, MO. “Our job is to make sure you’re covered so that if there is a claim, you’ve got enough money to cover your losses.”

When establishing the value of your company’s real property, or building and fixtures, there is one critical guideline to follow. While you might be inclined to insure your business real property for the tax or market value, business owners may wish to consider insuring for for the replacement value. Keep in mind that while market values have dropped across most of the country, replacement costs have risen.

Valuation basics

Remember that property is considered to be anything that has value. It can be classified as:

• Real property, which is land and the permanent things on it, like buildings, outdoor fixtures, permanent machinery and equipment; or
• Business personal property, which is all other property that’s not classified as real property and can be easily moved, like computers, telephones and office furniture.

Most business properties insurance companies use two different methods for determining the value of property:

• Replacement cost refers to the amount it takes to replace damaged or destroyed property with new buildings, equipment and furnishings.
• Actual cash value (ACV) is replacement cost of property less the accumulated depreciation for age and wear.

Many business experts agree that insuring for replacement cost is far better than insuring for actual cash value even though it could be a bit more expensive. The initial savings you might realize from a lower premium – even over a ten-year period -- could be a drop in the bucket in the event of a major loss and a costly rebuild to the original state. Business owners need to decide if they can afford that risk, particularly during a turbulent economy.

How much is your property worth?

Determining the value of your business personal property for your business owner’s policy is not difficult but it takes a little time and effort. If you’ve kept good records, such as receipts and expenses, you should be able to estimate the replacement value of your office furniture, equipment, and computers and other technological devices.

Take inventory of your stock and estimate the average value of it on any given week. If you have antiques, valuable artwork or other hard-to-replace items, have them appraised and include the total in your valuation.

One way to determine that figure is to engage a local contractor and request an estimate for replacing the building. Another way is to contact a Nationwide agent who can provide a state-of-the-art estimating tool.

Other valuation considerations

While some insurers might allow you to insure for less than 100% of the replacement cost, that might not be the best idea. Depending on your business owner’s policy and insurance company, you might have a co-insurance penalty clause. This means is that if you under report your insurance valuation or insure for less than 100 percent of replacement value, you’ll have to pay a penalty.

For example, if your building is valued at $300,000 and you have a co-insurance value of 90 percent that means you’re insuring for the building for 90% of its replacement value, or $270,000, and you would be able to collect the full amount of your losses up to $270,000. If you chose to insure the building for half of the co-insurance amount, or $135,000, you would be reimbursed for only half of the loss. So if you sustained a $50,000 loss, you would receive only $25,000.

Cautions Morehead, “If you under insure or under report the value of your business property to save money, you’re only hurting yourself in the long run.”

As your business grows, or worse, declines, you will want to review your coverage at your policy’s anniversary date and makes changes accordingly so that you always have adequate and appropriate levels of coverage.

In addition to basic business property insurance, you might want to consider adding a building ordinance and law endorsement. In the event of a major loss, you would be paid for the cost of repairing or replacing damaged or destroyed property to meet the current levels of local building codes and ordinances, which may have changed since your building was built.

Finally, if you make most of your profits during a specific season, such as a florist might during Valentine’s Day or a frozen yogurt stand in summer, you might want to add a peak season endorsement. This provides you with extra protection if your business suffers a major loss, including inventory, during your specified season.

Be sure to purchase a business property insurance policy that safeguards all of your assets and provides you peace of mind.

Get extra coverage with equipment breakdown insurance

Commonly called “boiler and machinery” insurance, equipment breakdown insurance provides coverage for damage caused to electrical and mechanical equipment through explosions, breakdowns and electrical arcing.

Flood insurance for peace of mind

Flooding can occur at anytime from natural or man-made disasters. Flood insurance provides coverage for losses to buildings and their contents due to flooding, an event not covered under property insurance. Nationwide offers flood insurance backed by the government-supported National Flood Insurance Program (NFIP).

Business income insurance

Also known as business interruption insurance, this covers a company’s loss of income resulting from damage or destruction of the property, and typically covers reimbursement for payroll, rental income and other expenses. Contact Nationwide today to learn more, or to receive a free, customized quote.