Many years ago, I sat in a board room with a large business client in Salt Lake City to review their upcoming insurance renewals. The room was filled with several people, including owners, managers, and the client’s outside attorney. Frankly, as a young insurance broker, I felt a little nervous (even timid) about the situation, but the nerdy part of me was über confident I new my stuff. As we were reviewing insurance liability limits, the President of the company asked, “How much liability insurance do we really need?” All of the sudden, without my crystal ball, I was feeling unprepared to answer the question. After all, in all my years as an insurance geek, I still have yet to come across a reliable formula to determine the answer to this question. Then, it hit me. I responded, “I think this question is well-suited for your attorney. What would he advise?” The company President turned to his attorney and asked the same question. The attorney responded, “Jon, how much liability insurance can you get?” I know it might sound crazy, but I think the attorney’s response was pretty darn good (and also protected his own butt). Frankly, any professional who claims to know how much liability insurance one should buy or who knows the formula for determining those limits is wrong and possibly even guilty of malpractice – unless, of course, they have a time machine and know what the future holds. Seriously, it would be like your financial planner telling you exactly what Apple stock will be selling for two years from now. Keep in mind that no one can predict how much one would be required to pay if one were involved in an accident that injured another. Frequently, I am asked by clients how much liability insurance they should have. This question inevitably comes up with someone who has an umbrella policy or is considering one in order to increase their liability limits above those available on basic homeowners, personal auto, and business insurance policies. In researching this topic with some reputable sources, I discovered the final answer to this question seems to frequently be: “consult with your financial/insurance professionals and/or attorney.” So, yeah, that was helpful for me as an “insurance professional.” I guess this means whatever I (or any other professionals) say must be right – until I’m hauled into court for giving bad advice. A common starting point in determining how much Umbrella or other liability coverage may be desired is net worth. To calculate net worth, add the value of everything one owns (including home, investments, bank accounts, and retirement accounts). Then, from that amount, subtract any liabilities or debts. The resulting number is one’s net worth. This is the total amount of liability coverage (including Umbrella limits) someone may want to purchase. Furthermore, one should consider their current and expected income. Higher limits of liability may be desired for a higher current or expected income. There is no precise formula that can calculate the exact amount of liability insurance you might need. As with most insurance decisions, the amount of insurance that is right for you depends greatly on your individual risk tolerance. But, the more you have to lose, the more liability coverage you will want to purchase. It’s after the wind blows or the fire burns. The insured is sifting through the rubble of what used to be his commercial building, looking for any savable scraps of what used to be.
The good news is that the loss is covered and the insured will be getting a check for the cost to replace the building. The better news is that the policy limit was adequate and the insured will not suffer the consequence of coinsurance. But it’s not over. The insured discovers that, due to increased demand resulting from widespread damage, hiring a contractor to remove the debris will be more expensive than anticipated. But that shouldn’t be a problem because the policy limit is adequate…right? Most commercial property policies will cover the cost to remove debris resulting from a covered cause of loss. However, coverage may be limited or excluded depending on a few important factors addressed in the policy. Factor #1 – How much is enough? First, consider that it is not cheap to remove certain types of debris. For example, removing debris of an old frame building may be less labor-intensive than debris of a building with substantial masonry or steel. Removing such items will likely require the use of a contractor and heavy equipment. Also consider that high demand brought on by widespread damage will likely increase the contractor’s fee for service. Second, consider how the policy calculates coverage to remove debris. Most policies say that the insured will have access to a stated amount—typically $10,000—plus the lesser of:
For example, consider a loss to a building valued at $1 million. If the loss amount is $100,000 and the deductible is $5,000, coverage would be determined as follows:
In this claim, the insured has access to $25,000 plus the stated amount of $10,000 to clean up the mess. Now consider the same building, only this time it is a much greater loss of $900,000. Coverage would be determined as follows:
In this claim, the insured has access to $105,000 plus the stated amount of $10,000 to clean up the mess. In the event of a total loss, it’s likely the policy won’t pay more than the stated amount of $10,000. The purpose of these examples is to show that the more severe the loss, the less money the policy includes for cleanup. Factor #2 – What is ‘covered property? Most commercial property policies will pay only the cost to remove debris of “covered property.” This definition includes items specifically listed as such in the policy. The policy also lists items that are defined as “property not covered.” Items meeting this definition may also require cleanup, and the cost associated will not be paid by the insurance company. Examples of these items include pieces of the parking lot, building foundation, landscaping, and items that end up on your property from somewhere else. Factor #3 – Pollutants If a building is damaged and the site must be cleared, items defined in the policy as “pollutants” may require special care. For example, consider a print shop that catches fire, releasing highly toxic inks and dyes into the ground. Local engineers may require you to extract those pollutants from the site. If so, the cost may be substantial and is typically not covered by a commercial property policy or is limited to a specified dollar amount that may not be enough, such as $10,000. What’s the Solution? The best solution to this potentially large gap in coverage is to call Jon Jepsen at SentryWest Insurance (your Trusted Choice® insurance professional). We can help you amend your existing policy to offer more coverage for the cost to clean up debris. We can also help you minimize your exposure by amending the policy to cover items that are currently excluded, such as those examples listed above. Further, we can help you understand the meaning of “pollutants” in your policy and determine if your property contains items that may require special care to remove. Today more than 43 million Americans are operating full- or part-time businesses from the comfort of their homes, and these numbers continue to grow every year. One of the secrets to running a successful home-based business is being able to separate your business activity from your home activity. Jon Jepsen of SentryWest Insurance in Salt Lake City, Utah understands these principles and can help guide you through the challenging maze.
Whether you spend two hours or 62 hours per week on your at-home endeavor, it remains a business with all the risks and rewards associated with owning a business. To safeguard against the risks, Jon Jepsen wants you be aware that your homeowners insurance policy offers limited or no protection for your business while it is being operated from your home. If you rely on your homeowners policy as your only means of insurance protection, you may find your business underinsured or uninsured in the event of a loss. Doesn’t My Homeowners Policy Cover My In-Home Business? Homeowners policies were never intended to cover business exposures. Consequently, coverage for the items you use in your business such as computers, fax machines, filing cabinets, tools and inventory are limited to $2,500 in your home and $250 away from home under most policies. And your homeowners coverage provides no liability insurance for your home-based business. How Do I Get The Coverage I Need? First, let’s take a look at what coverage you may need. Insurance coverage generally falls into two categories. This is true of homeowners, auto and most business policies. Those two categories in business terms are: • Property Coverage–Your business structures and possessions are covered against loss or damage caused by certain covered risks such as fire and theft. • Liability Coverage–This means that if you become legally obligated to pay money to another person for bodily injury or property damage caused by your business, your insurance company will cover those costs (up to the maximum indicated in your policy), including the costs of defending your business in the lawsuit. This liability coverage extends to medical payments for injured parties, for which you may be held responsible. Of course, every business has its own special requirements. There are many specific insurance coverages available to address the needs of your in-home business. What Are My Policy Options? There are several types of insurance policies available for in-home businesses. They include: • Incidental Business Endorsement–Depending on your business, you may be able to attach an “incidental business endorsement” to your existing homeowners policy which will cover other structures or equipment on your premises that you use for business. This endorsement can also be tailored to include your business liability. • Business Owners Package Policy–If your in-home business does not qualify for coverage under the “incidental business endorsement” you can purchase coverage for your home-based business under a business owners package policy, referred to as a BOP, which provides property and liability coverage. • In-Home Business Owners Policy–Some insurance companies offer policies that combine homeowners and business owners coverage into a single policy, designed specifically for in-home businesses. These policies provide both business coverage such as business liability and replacement of lost income, and homeowners coverages such as fire, theft and personal liability. These policies eliminate gaps and duplications in coverage, and the rates reflect the in-home status of your business. Check with Jon Jepsen at SentryWest Insurance or your independent insurance agent to determine which of these coverages is appropriate for your in-home business. Vehicles Used In Your Business If you have a personal vehicle that you sometimes use for business or if your in-home business is the owner of one or more vehicles, Jon Jepsen, or your Trusted Choice® insurance professional, can advise you whether you will need to purchase a Personal or Commercial Automobile Policy. Protecting Yourself If your in-home business is your full-time occupation, you may need health and life insurance and a retirement plan. In other words, you may need to provide employee benefits to yourself. Some options to consider are: • Life Insurance–The insurance company pays a stated amount of money upon your death to the person(s) named as beneficiaries by you. • Disability Insurance–This insurance provides for payments to be made to you if sickness, disease or bodily injury prevents you from being able to work. • Health Plan–There are various plans available that cover doctor visits, hospital services, medical tests and other costs incurred in medical care. • Annuities–These are periodic monetary payments made over a specified term or for your life. You make payments to the insurance company in a lump sum, periodically, or as you arrange with the insurance company. It may be possible to purchase a combination of annuity and life insurance. • Workers Compensation–If you hire employees, you will need to know about this type of insurance. All states require employers to purchase it if they have employees. Workers compensation insurance offers a schedule of benefits, without regard to liability, should an employee become injured as a result of a job-related accident or suffer an illness attributable to a workplace cause. If you own an incorporated business, workers compensation also can cover you in case you are injured. A Final Note Remember that in order for any business to be successful it must be run like a business, regardless of its location. A crucial element in business success is the ability to minimize risks which can be accomplished with a comprehensive insurance program. Check with Jon Jepsen of SentryWest Insurance, or your Trusted Choice® insurance professional, for the best business coverage for your in-home business. |
AuthorJonny Jepsen, CIC Categories
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