There’s a lot to keep on top of when you’re running a small business, especially if that business is growing. Growth is great, right? If you’re not moving forward, you’re just standing still, so embrace all of the changes that come your way. But as your business grows and changes, don’t forget that your insurance policies need to keep up.
If you haven’t reviewed your commercial property insurance (or your business owner’s policy) lately, then it’s time to take a good look at whether it’s covering the full value of your property and business belongings. Doing a thorough valuation of your business and your insurance options may take some time and effort, but with a few helpful tips, you can get it done and have peace of mind knowing that you’re fully insured!
What You’re Valuing
First, let’s take a look at what your commercial property insurance actually covers, and what you need to determine the value of. The term “property” in the insurance industry doesn’t just refer to the land that your business sits on, it refers to anything of value that would need to be repaired or replaced in case of a disaster, like fire, theft, or extreme weather. Property can be broken down into two categories:
- Real property – refers to everything that is permanent about your business: the building, outdoor fixtures, and any permanent equipment that cannot be moved.
- Business personal property – anything that you own in relation to your business and that would not be considered real property. This can include computers, furniture, inventory, small kitchen equipment, or anything that can be easily moved.
How to Value Your Property
Next, it’s time to think about how much your property is worth. This shouldn’t be overly complicated, but it does require a little work on your part.
- For real property: As we will see later, valuing your building does not mean simply telling your insurance company how much you paid for it, or how much you would sell it for. The best way to value your real property is to contact a local contractor and discuss the size and function of your space. They will be able to give you a more accurate estimate based on location and function. Don’t forget to include any special features that might add to the cost of rebuilding. Remember, too, that you should revisit this figure every year, especially if you are growing and adding on to your business!
- For business personal property: This is when being a well-organized business owner pays off. As long as you’ve kept records and receipts of your purchases and expenses, you should be able to estimate the cost of replacing things like electronics, furniture, and equipment. If you have stock, take inventory and estimate the value of it on any given week. Get any antiques, artwork, or hard-to-replace items appraised and add them into your valuation.
Your Valuation Options
Next, you need to consider not just what is being insured, but how. You might think, you paid a certain amount for your building or equipment, and that’s how much it’s insured for, right? But that isn’t always the case. There are actually four different ways of valuing property:
- Market value – This is what most people think of when they think of the value of their property. Simply put, market value refers to how much your property would sell for if you sold it today. Confusingly, insurance companies usually do not use this as an option for valuing your business, but you can use it to help you decide which of the following valuation options are best for you.
- Actual cash value (ACV) – When using this method to value your property, insurance companies will basically look at how much you paid for the property, then take into account depreciation for wear and tear. For example, if you bought your business’ computers 4 years ago for $1,000, you would not get that full amount back with this method; your claim would take into account their age and the amount they have been used. These types of policies generally have lower premiums but you will also recoup less of your money if you make a claim.
- Replacement cost – This is the most popular type of property insurance valuation method. It covers the cost of rebuilding your building or replacing your property with materials or items of the same value. Depreciation is not taken into account, so you’ll get more coverage, but will also pay more up-front in premiums. In some cases, the extra money might be worth it; the relatively small amount you save on premiums might not compare with the cost of a disaster.
- Functional replacement cost – Although not used as often, this method makes sense for businesses that are housed in old buildings. It allows you to rebuild with materials that are “functionally” equivalent to the antique or outdated materials in your old building. You might not be able to recoup your antique fixtures, but you would be able to get more affordable premiums and a payout that does not take into account depreciation.
Business Property Valuation in Action
Finally, let’s look at how a claim might work in the real world, using a real property example. Let’s say there is a fire in your building, which is an old structure built of stone, with marble in the interior. It would cost $1 million dollars to completely rebuild it using the same materials.
- If your building is totally destroyed, and you had a replacement cost policy, you would receive $1 million to rebuild. But if you had an ACV policy, you might have insured it for $700,000, so that is how much you would get to rebuild. You would also have been paying less in premiums up to this point.
- If your building is partially destroyed, and only the roof needs to be replaced, you would make a claim for only the roof. If it will cost $50,000 to repair and you have a replacement cost policy, you would get $50,000. If you have an ACV policy, which takes into account depreciation, the amount you would get would depend on how old the roof was. If it was brand new, you might get the full $50,000; if it was 50 years old and ready to collapse, you’d probably get very little.
Valuing your property and figuring out the best way to insure it may seem like a daunting task, but it’s necessary for protecting everything you’ve been working for. Not every part of owning a business is fun and games, right? Keep a close eye on your commercial policies and they’ll be there for you in case of bad times. And if you need a partner in preparing for rainy days, EZ is here to answer your insurance questions and provide you with instant, accurate quotes when you need them. We’ll set you up with your own personal agent who can guide you through all the ins and outs of commercial insurance. Your business is worth it! To get started with us, simply enter your zip code in the bar above, or you can speak to an agent by calling 888-615-4893.