By: BJ Bauer, AAI
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Recent inflation, labor shortages, supply chain disruptions, and financial market volatility present direct challenges to businesses of all types. But their effect runs much deeper than some business owners realize. These same factors are not only increasing the cost of insurance, but also eroding the value of current policy limits. Assets insured last year may be grossly underinsured this year. In particular, coverages for business auto/truck, buildings and contents, and equipment are at risk.
Many insurance companies protect clients from becoming underinsured by offering an inflation guard on property insurance policies. This is a client-elected option and automatically increases the policy limits of business property each year, usually 3% to 8%. But not all policies have inflation guard and, even for those that do, inflation can outpace its protection.
For example, at the time of this writing, the U.S. Bureau of Labor Statistics shows the opens in a new windowconsumer price index at 7.9% and climbing. But we know certain items such as building materials and vehicle prices have increased much more than that. In fact, over the past two years inflation increased well beyond the inflation guard protection of many insurance policies. Further, inflation guard typically applies only to the value of buildings and not contents, equipment, or business auto/truck.
Many business auto policies provide coverage equal to the actual cash value of the vehicle. That way, when damaged, the vehicle is valued based upon its age and condition. This approach works well and is self-adjusting for most changes in market value. However, it does not work in all situations and certain vehicles are valued based on either 1) a stated amount, or 2) an agreed amount. These latter two methods do not adjust automatically. And since inflation guard does not apply to business auto, the only way to compensate is for the client to manually request their coverage levels be changed. The U.S. Bureau of Labor Statistics reports the consumer price index for used cars and trucks jumped 41% from January 2021 to January 2022, meaning vehicles valued by a stated or agreed amount are now at high risk of being underinsured.
Equipment & Machinery
The cost of business equipment increased 22% during the same period. Thus, if a business had machinery insured for $50,000 last year, that same equipment is likely worth $61,000 now. Price increases for specialty equipment can be even larger. Most business equipment policies provide coverage based upon a stated amount or an agreed amount and thus need to be reviewed and adjusted manually.
Buildings and Contents
While reviewing policy limits, ensure buildings are adequately covered, even if protected by inflation guard. But pay particular attention to the coverage limits for business contents. Business contents are usually not protected by inflation guard and the same coinsurance penalties apply should a claim occur and they be found to be underinsured.
Coinsurance applies to buildings and contents and requires they be insured at an appropriate level, usually 80%, 90%, or 100% of the cost to replace them. If not, a coinsurance penalty will apply. For example, if a business has $1,000,000 in contents and the policy has a 90% co-insurance requirement, then the client must set policy limits to be at least $900,000. If not, should a claim occur, not only will the contents be underinsured but a coinsurance penalty will be added on top of the claim payment. For more detail on coinsurance, reference The Hidden Risks of Under-insuring Buildings | Insuring to Value | Coinsurance Explained.
We recommend each client review their policy limits at least once a year. However, with inflation and other challenges, they should be reviewed more often, on an as-needed basis. Questions on your policy limits? Contact your Bankers Insurance agent. Not a client of ours? Let us earn your business! Each client is assigned a personal agent in our office, given their email address, and provided a phone number that rings right on their desk.
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