Business Insurance Explained
Business Interruption Insurancecovers a business’ loss of earnings as a result of damage to or loss of business property. Reimbursement for salaries, taxes, rents, other expenses and profits that would have been earned during the period of interruption are also often included.
For example, if a woodworking shop suffers a fire which renders all of the equipment unusable, the woodworking shop would not be able to fulfill any of the outstanding contracts, resulting in a loss of these earnings. Depending on how long the shop is shut down or unusable for, the company could suffer extensive losses; especially as some clients would move their contracts elsewhere.
Business Interruption losses can be very extensive; while standard property policies may cover reinstatement of your buildings and some or all of the machinery, they will not extend to cover any losses to the income of your business. Business Interruption insurance will provide coverage in this area and help to minimize the financial impact. Losses can affect businesses for months if not years – you must consider the cost of what it will take to bring the company into the same position it was in immediately prior to a loss; this can take quite some time depending on the size, nature and extent of the business operations.
We strongly recommend that businesses consider Business Interruption insurance and to speak with their insurance broker to ensure adequate limits and extensions of cover are sought.
Extra Expenses coverage provides for additional expenses incurred following a loss; that would not have been incurred in the normal course of business.
For example, prior to a loss your business makes a monthly rent payment of $1,000; after a loss you are required to relocate temporarily until such time as your building has been repaired however, the only building available costs $2,000 per month to rent - the extra expense would be the additional $1,000 rental payment per month.
By-Laws
Definition
If there is insured damage to your office and you are required, by law, to repair or rebuild to a certain standard (use of 2x6s instead of 2x4s for example), By-Laws provides coverage for the costs you may incur in complying with applicable laws.
Applicable laws may require you to rebuild 100% of the office if it has suffered damage to at least 75% (or less) of the property. By-Laws would provide for demolition and removal of the undamaged portion and provide coverage for any improvements required by law; you may also require further coverage for the additional time required for rebuilding (a form of business interruption coverage).
For Example – The replacement cost for your office building has been calculated at $1,000,000, which means that if there is a total loss (fire for example), it will cost $1,000,000 to rebuild with like material and quality. However, laws and regulations can change which may require upgraded materials to be used. Since your building was originally built, a law has been implemented, for example, stipulating that sprinkler systems must be installed in all new buildings; as this was not in the original building, the replacement cost would not have been calculated including the cost of installing a sprinkler system. This extra cost is not covered in the $1,000,000 which means you’re your business is, technically, uninsured for those costs. By-Laws coverage would pay for this enhancement to your office as it is required by law.
If your building no longer conforms to zoning by-laws (located in an area which is now zoned as residential property only for example) which could affect any repairs or replacement, speak to your broker about whether By-Laws coverage would include relocation to a commercial zoned location. Insurers vary widely in this respect and we encourage you to discuss this with your broker should you find yourself in this situation.
Insurers vary in this respect, while some include By-Laws coverage automatically; others charge a small fee to add this to your policy.
In the example above you would be responsible for paying the increased cost of enhancing the property by installing a sprinkler system and / or the cost of relocating, which could amount to tens of thousands of dollars if not more.
Ensure the replacement cost for your building is up-to-date, this will reduce the risk of underinsurance overall. Also, consider the small fee (if this cover has not been automatically included) for By-Laws cover.
Co-insurance is a complex policy clause that appears in business property insurance policies such as buildings, stock and equipment.
The clause stipulates that you (the insured) are required to insure your property for a certain amount (usually expressed as a percentage) based on the value of the property insured; if you fail to do so, you agree to insure yourself for all losses in the same ratio as your failure to comply with the required level of coverage (i.e. you must pay the difference).
For example
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Building Value
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$100,000
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Actual Limit of Insurance (Insured Value)
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$60,000
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Amount of Loss
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$10,000
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Co-insurance requirement
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100%
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Underinsured by
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40%
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The above shows that the building should have been insured for $100,000 (i.e. 100% of the building value) but it was only insured for 60% of the value, which means that the insured has agreed to insure themselves for 40% of any loss. Accordingly, where a loss of $10,000 occurs, the insurer will only pay a maximum of $6,000.
Calculation as follows:
(Actual Limit / Required Limit) x Amount of Loss = Maximum Claims Payment
($60,000 / $100,000) x $10,000 = $6,000
It is often the case that co-insurance requires policyholders insure their property to 80% or 90% of its value; taking the above example, the following maximum payments would result.
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Co-insurance requirement
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80%
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Co-insurance requirement
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90%
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Required Limit of Insurance
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$80,000
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Required Limit of Insurance
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$90,000
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Underinsured by
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25%
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Underinsured by
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33%
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Maximum Claim Payment
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$7,500
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Maximum Claim Payment
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$6,666
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If you do not have the required level of insurance to comply with the co-insurance clause in your policy / policies, you may be required to pay for a portion of any claim which arises, as highlighted in the above examples.
Co-insurance appears in almost all business property insurance policies; each insurer will vary in practice and each policy will be different with respect to the level of cover required. If you have multiple business insurance policies you must ensure you understand the required level for each individual policy. We strongly recommend that you speak with your broker to ensure your limit of insurance has been adjusted to meet your current insurer’s requirements. We also suggest that an appraisal on your property be conducted by an expert in the field as this will help determine what levels you will need to adequately insure your property.
CGL is the term used to describe all business liabilities excluding automobile liabilities. CGL typically covers a collection of liabilities specific to your business and will often include bodily injury and property damage liability arising from your company’s operations.
Examples of types of business liability:
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Products
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Personal Injury
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Premises
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The above are some examples of the type of liabilities which may fall under your CGL policy; as every policy is different, we recommend that you contact your broker to discuss what coverage is appropriate for your company.
Companies’ receipts are used to calculate the premium required for certain liability coverages. These receipts give your insurer an idea of the size of your business; as your insurer cannot predict the size of your business looking forward, they look back at the past year to identify its size and whether it has grown or shrunk compared to previous years. Once the insurer has reviewed your receipts they will calculate the premium to reflect your exposure to losses.
Depending on the type of liability and the type of operations your company performs, an insurer will use different measures to calculate the premium payable. We recommend that you speak with your broker to ascertain whether a calculation based on receipt figures is the method suitable for your business.
Cross liability stipulates that the insurance provided under your policy applies to each person insured. For example, in a situation where one insured (employee) has injured another, cross liability allows for each to be treated as a separate entity and, therefore, a claim can be submitted following such an injury. If cross liability was not included, all employees under one policy would be treated as one entity; as one cannot claim against oneself, no such claim for injury could be made.
This is only one example of how cross liability can apply; if you believe a situation has arisen where cross liability should apply, speak with your broker to identify whether coverage would be provided by your insurer.
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