Risk & Business Magazine Cooke Insurance Group Fall 2016 | Page 29

LOSS LESSONS CASE #2– BUSINESSES UP IN SMOKE n insured owns and operates a wholesale dry goods business that has been in operation for over twenty years. The value of the building has increased significantly over the years because of several expansions and upgrades, as well as from real estate appreciation in the area. The building had an approximate replacement value of $5M. Contents and stock held on premises at any one time usually exceeded $2M. The insured maintained insurance policy limits of $1.5M for the building and $1M for contents and stock. A ENTIRE BUSINESS DESTROYED BY FIRE The store, its entire contents, equipment and stock were totally destroyed in a fire, which was caused by a frayed extension cord. The insured’s total insurance claim settlement was $2.5M (full limits of the policy). The combined real replacement value of the store, contents and stock was roughly $7M. Rebuilding the store and replacing the contents and stock to its previous condition resulted in an avoidable net cost to the insured of $4.5M. HUGE LOSS DUE TO LACK OF COINSURANCE CLAUSE This insurance policy did not contain a coinsurance clause and there were no policy clauses that required minimum coverage limits to be maintained. Therefore, the insured, although not liable for any portion of the claim amount under the policy, ultimately suffered a huge financial loss as a result of the total loss of their business. It’s crucial to protect your business investment by insuring the full value of your property and other valuable assets. By doing so, you can avoid unnecessary financial hardship in the event of a loss. LESSONS LEARNED MAINTAIN ADEQUATE INSURANCE COVERAGE It is critical for businesses to have accurate appraisals for all assets to ensure they maintain a sufficient amount of insurance coverage. REVIEW ASSET VALUATIONS ANNUALLY Ensure all significant property and contents are appraised annually to ensure accurate valuation. It’s important to consider construction costs when considering your coverage amount. Address significant increases in costs by increasing your insurance coverage and limits. REVIEW MATERIAL CHANGES IN PROPERTY The insured would have benefited from having property valuations after each upgrade to the building. Since real estate appreciates over time, annual real estate valuations would have protected the insured against inflation. USE QUALIFIED PROPERTY APPRAISERS Retain the services of an independent and qualified property appraiser. Asset valuations should always be accompanied with formal appraisal reports that identify the purpose of the valuation, basis of the valuation, the credentials of the appraiser and supporting evidence to justify the appraiser’s valuation. USE APPROPRIATE VALUATION METHODOLOGY Property appraisals consider the replacement value of your assets. An accounting valuation does not consider the financial impact if assets are damaged or destroyed. This could leave you exposed to financial hardship if you suffer partial or total destruction of any asset and you carry inadequate insurance to repair or replace the asset. Accounting valuations are useful to minimize the tax liability of assets and their values. However, if you use accounting valuations of your assets for insurance purposes, this can cause your assets to be severely undervalued and underinsured. REVIEW AND UNDERSTAND ALL INSURANCE REQUIREMENTS Consult your Broker to review coverage requirements on a regular basis, including the valuations for all insured assets. + LOSS LESSONS: REQUEST A QUOTE TODAY! INSURING TO [email protected] VALUE BY: COOKE INSURANCE GROUP 1-800-566-5666 FALL 2016 | 29