Recently a client asked, “Why do I have to be careful about insuring for the full value of my stuff? I’ll never lose it all anyway.”
My answer? Insurance to value is a big deal, possibly a disaster, and it’s not the place to try to save money.
Here are some reasons why you want to be careful ~
Most people underestimate values of buildings, business contents, equipment and supplies. Perhaps they bought it a long time ago, or in small quantities, or used. It can be hard to focus on today’s prices for replacement cost.
When you need to replace you may not be able to wait or find the same ‘deal’ you got before. And taxes and shipping can add 10 to 15%.
Many insurance policies have a co-insurance clause which says if you’ve low-balled your values they won’t pay the full loss – even for a small claim.
A simple example ~
Let’s say you’ve got $100K in furniture and equipment and you only declare $50K. There’s a small electrical fire from a coffee maker left on over the weekend and fire, smoke and water damage result in a $35,000 loss. A break-in and theft could amount to the same. The co-insurance clause on your policy means the adjuster offers you 50% of your loss, less your $1,000 deductible, or $16,500. If you have to replace everything to meet a customer deadline, will you still be able to meet payroll next month?
Hey, you saved about $1,000 in premium by under-insuring – but now you have what’s effectively a $17,500 deductible! If you had thought this through, you would have declared the total value and raised the deductible to perhaps $2,500. That might have cost you another $700 per year but paid the full loss and kept you solvent.
Some action steps to save your bacon ~
- List all your stuff in appropriate categories (furniture, equipment, supplies, etc.) and use reasonable replacement costs – new.
- Add details when necessary to completely describe the items – a table is usually a table, but one antique or computer can be vastly different from another.
- Take pictures, keep receipts, note serial numbers and store everything off-site – remember you will need to ‘prove’ your loss including what it was and that you actually owned it!
- Update your list each year, increase values for inflation, and give a copy to your broker prior to renewal.
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