Unanticipated loopholes in a property and casualty insurance policy can cause major headaches for investors and claimants alike. Whether it’s ambiguous language in a policy that’s construed against the insurance provider or a miscommunication as to how deductibles will be applied, these problems can be expensive and time-consuming to unravel. What three things should investors carefully analyze when reviewing a property and casualty insurance policy?
Business Interruption Insurance
As the COVID-19 pandemic demonstrated, the difference between a business that survives a sudden government-mandated shutdown and one that doesn’t can lie in the strength of their business interruption insurance policy. This type of insurance is often included as an additional coverage option for companies seeking property, casualty, and liability insurance coverage.
Business interruption insurance is designed to compensate a business owner for time they’re not able to run their business—through no fault of their own. This can cover everything from construction that blocks a business entrance to a fire or natural disaster that levels the building. But business interruption insurance policies are filled with exclusions, and should be carefully scrutinized to ensure they reflect both parties’ intent.
Deductibles are another common area where assumptions can often steer the insured wrong. Higher deductibles generally mean lower premiums, which can make high-deductible policies attractive, but business owners may be surprised to learn just how much they’ll have to shell out before they can receive any benefits under their insurance policy. In other cases, a claim may be subject to several deductibles, depending on what type of damage is being claimed.
It’s important for the policy and all communications to clearly explain how deductibles are applied and what deductibles apply to each policy provision. By avoiding miscommunication before a claim arises, policy owners, policyholders, and investors alike will have a better idea of what to expect when a claim is made.
Determining Actual Cash Value (ACV)
Generally, after a loss, the insured should be able to recover the actual cash value of any damaged property. These ACV payments can be helpful in keeping businesses on their feet while they replace equipment and explore reconstruction options. But assessing the ACV of each piece of property lost can be a complicated and time-consuming process. The IRS’s depreciation tables are a start, but may not adequately reflect the asset’s value, especially if the asset played a key role in the business’s revenue.
Depending on the terms of the policy, the insured may be able to claim ACV of lost items even if they’re not replaced. For business owners that can use all the cash available during the rebuilding process, this type of policy provision can result in a significantly higher payout than if only ACV for replaced items is allowed.
Insured businesses should keep their inventories up to date. This provides an excellent starting point in assessing ACV and can make it easier to challenge any valuations that don’t seem to capture the asset’s value.