Photo courtesy Salva Barbera
Your business is beautiful.
Your business is a reflection of you and your hard work. That's what makes it beautiful.
You worked really hard to build it.
So your insurance should work just as hard to protect it.
I'll talk about some of the basics, so you and your agent can work better together.
What does a commercial insurance policy in Arizona cover?
A basic business insurance policy in Arizona will include coverage that protects your building, your business property, your business income, and your business assets in case you are sued (we call this business liability insurance).
Typical small business policies in Arizona bundle these coverages in a specific type of policy called a BOP (Business Owners Policy). BOPs are pre-packaged with the most common types of coverage that most businesses need. They are a great convenience. But I thought I'd separate the features in order to help you understand each coverage a little better.
In this article, I'll focus on Building Coverage and Business Personal Property coverage. I'll talk about Business Liability coverage in my next article. I also wrote an article about Business Income Protection (also known as Business Interruption Coverage) here.
So let's get started!
You worked really hard to build it.
So your insurance should work just as hard to protect it.
I'll talk about some of the basics, so you and your agent can work better together.
What does a commercial insurance policy in Arizona cover?
A basic business insurance policy in Arizona will include coverage that protects your building, your business property, your business income, and your business assets in case you are sued (we call this business liability insurance).
Typical small business policies in Arizona bundle these coverages in a specific type of policy called a BOP (Business Owners Policy). BOPs are pre-packaged with the most common types of coverage that most businesses need. They are a great convenience. But I thought I'd separate the features in order to help you understand each coverage a little better.
In this article, I'll focus on Building Coverage and Business Personal Property coverage. I'll talk about Business Liability coverage in my next article. I also wrote an article about Business Income Protection (also known as Business Interruption Coverage) here.
So let's get started!
Three types of business policies:
"Fire!"
You know that property insurance covers fire. But what about a nearby nuclear reactor meltdown, like Chernobyl? Or an alligator attack? (Just checking to see if you were reading.)
The insurance industry uses three different policy forms that tell you in advance what types of tragic events are covered, or are not covered.
Most companies use standardized policy forms by ISO (Insurance Services Office). ISO is a wholly owned subsidiary of Verisk Analytics. You can read more about them here.
Having three types of policies allows you, the business owner, to have some choice in premium. The more that's covered- the higher the cost.
Let's look at these three policy forms:
You know that property insurance covers fire. But what about a nearby nuclear reactor meltdown, like Chernobyl? Or an alligator attack? (Just checking to see if you were reading.)
The insurance industry uses three different policy forms that tell you in advance what types of tragic events are covered, or are not covered.
Most companies use standardized policy forms by ISO (Insurance Services Office). ISO is a wholly owned subsidiary of Verisk Analytics. You can read more about them here.
Having three types of policies allows you, the business owner, to have some choice in premium. The more that's covered- the higher the cost.
Let's look at these three policy forms:
1. Basic Form
This is the least expensive type of policy.
The Basic Form is often used when property is not in the best insurable condition. It's also sometimes used when a building is vacant. Essentially, it's a fallback plan when price or insurability are issues.
Most commercial property policies written in Arizona do not use this type of policy form.
The Basic Form covers only specific and named perils.
These include:
Remember, in this type of policy, if it's not named as a peril... it's not covered.
The Basic Form is often used when property is not in the best insurable condition. It's also sometimes used when a building is vacant. Essentially, it's a fallback plan when price or insurability are issues.
Most commercial property policies written in Arizona do not use this type of policy form.
The Basic Form covers only specific and named perils.
These include:
- Fire
- Lightning
- Windstorm or Hail
- Explosion
- Smoke
- Vandalism
- Aircraft or Vehicle Collision
Remember, in this type of policy, if it's not named as a peril... it's not covered.
2. Broad Form
This is the most common policy issued to business owners in Arizona.
The Broad Form policy often costs a bit more, and though it covers all of the named perils in the Basic Form, it adds a few more, such as:
Often, insurance companies expand on the Broad Form, and it can be pretty awesome in coverage after it's custom-tailored to your business.
But remember, just like the Basic Form, if it's not named, it's not covered.
The Broad Form policy often costs a bit more, and though it covers all of the named perils in the Basic Form, it adds a few more, such as:
- Weight of Snow, Ice, or Sleet
- Water Damage
- Falling Objects
- Glass Breakage
- Building Collapse
Often, insurance companies expand on the Broad Form, and it can be pretty awesome in coverage after it's custom-tailored to your business.
But remember, just like the Basic Form, if it's not named, it's not covered.
3. Special Form
The Special Form policy type is the most expensive, and the most unique. It begins with a different foundation. It says that *everything* is covered, except what is excluded. That's why it's also sometimes referred to as an "all perils" or an "all risks" policy.
So if "alligator attack" isn't specifically excluded... it's covered.
Most businesses don't purchase this type of policy because of price. Some insurance companies don't offer this either. Instead, they expand the "named perils" so widely on their Broad Form policy, that it isn't necessary to offer a "pure" Special Form policy.
So if "alligator attack" isn't specifically excluded... it's covered.
Most businesses don't purchase this type of policy because of price. Some insurance companies don't offer this either. Instead, they expand the "named perils" so widely on their Broad Form policy, that it isn't necessary to offer a "pure" Special Form policy.
Typical Exclusions
Almost all standard commercial property policies in Arizona include a long list of exclusions. These can be excluded by name (as in a Special Form policy, or simply omitted as a covered peril in Basic and Broad Form policies).
The good news is that some of these can be covered by adding optional coverage to the standard policy. Here is a list of few of them. There are usually more. You should ask your agent about which of these standard exclusions can be covered for an extra premium:
A few of these are uninsurable by any company, such as War and Nuclear Hazard. But many of these exclusions can be covered optionally. Ask your agent.
The good news is that some of these can be covered by adding optional coverage to the standard policy. Here is a list of few of them. There are usually more. You should ask your agent about which of these standard exclusions can be covered for an extra premium:
- Earthquake
- Flood
- Power Failure
- Neglect
- War
- Nuclear Hazard
- Intentional Acts
- Pollutants
- Robbery, theft or burglary
- Employee Fraud or Dishonesty
- Ordinance of Law (Zoning changes)
A few of these are uninsurable by any company, such as War and Nuclear Hazard. But many of these exclusions can be covered optionally. Ask your agent.
Which Policy Form Should You Choose?
That's going to be a different answer for each business owner.
Just be aware of these differences, and discuss the "what-ifs" carefully with your agent. Each policy is different, and prices can vary substantially by the choices you make. So get your list of "what-ifs" together before sitting down with your agent.
Even if one of your "what-ifs" includes alligator attack.
Just be aware of these differences, and discuss the "what-ifs" carefully with your agent. Each policy is different, and prices can vary substantially by the choices you make. So get your list of "what-ifs" together before sitting down with your agent.
Even if one of your "what-ifs" includes alligator attack.
Building & Contents Coverage
A typical commercial insurance policy in Arizona will cover the building you own as shown on the Declarations Page. That's usually the first page of your policy.
It will also typically cover permanently installed fixtures and equipment used to run your business, as well as attachments to the building. And if you lease your business space, "improvements and betterments" are typically covered as well.
You, as a business owner, have some critical choices to make when it comes to deciding how much to insure your property for. They affect your premium, and your future claims.
So let's look at those choices:
It will also typically cover permanently installed fixtures and equipment used to run your business, as well as attachments to the building. And if you lease your business space, "improvements and betterments" are typically covered as well.
You, as a business owner, have some critical choices to make when it comes to deciding how much to insure your property for. They affect your premium, and your future claims.
So let's look at those choices:
Replacement Cost or Fair Market Value
Most of us understand this choice when it comes to our home. Replacement cost means that if something I own is burned up in a fire, the insurance company will pay to replace it with a new item of similar quality, up to the policy limits.
If you choose "Fair Market Value" (or "Actual Cash Value") as the option for claims paid, the formula for a claim to be paid would begin at the depreciated value, not the cost to replace or rebuild like new.
Obviously, this affects the premium. Fair Market Value is the less expensive way to go, but it will pay out less at claim time.
And there is a unique wrinkle in this formula. Let's look at that now.
If you choose "Fair Market Value" (or "Actual Cash Value") as the option for claims paid, the formula for a claim to be paid would begin at the depreciated value, not the cost to replace or rebuild like new.
Obviously, this affects the premium. Fair Market Value is the less expensive way to go, but it will pay out less at claim time.
And there is a unique wrinkle in this formula. Let's look at that now.
The Coinsurance Choice
Coinsurance in a commercial insurance policy is treated differently than other types of insurance policies where the term "coinsurance" is used.
Coinsurance in commercial property policy means that there is a requirement to insure your property to a certain percentage of its appraised value. The amount you choose for coinsurance will affect your premium. We all understand that.
But many business owners don't understand that the coinsurance must work in tandem with a properly appraised value, or there will be a penalty at claim time.
Here's where you can get in trouble:
Let's say that your building was appraised at one million dollars in 2005, but now it's appraised at 1.4 million dollars. You had a 90% coinsurance option in your policy, and you haven't increased the original insured amount since 2005.
The building burns down tomorrow.
You'll be penalized for underinsuring your property according the the coinsurance provisions.
It's somewhat complicated. And very important. And a very good reason why you need an experienced insurance agent to help you insure your property correctly. Here's an in-depth article that may help explain this coinsurance concept.
Coinsurance in commercial property policy means that there is a requirement to insure your property to a certain percentage of its appraised value. The amount you choose for coinsurance will affect your premium. We all understand that.
But many business owners don't understand that the coinsurance must work in tandem with a properly appraised value, or there will be a penalty at claim time.
Here's where you can get in trouble:
Let's say that your building was appraised at one million dollars in 2005, but now it's appraised at 1.4 million dollars. You had a 90% coinsurance option in your policy, and you haven't increased the original insured amount since 2005.
The building burns down tomorrow.
You'll be penalized for underinsuring your property according the the coinsurance provisions.
It's somewhat complicated. And very important. And a very good reason why you need an experienced insurance agent to help you insure your property correctly. Here's an in-depth article that may help explain this coinsurance concept.
My Advice
My advice is simple: Talk To An Experienced Agent.
Most business owners I talk to haven't reviewed their insurance coverage in several years. In this time of rising property values and rising costs, an Arizona small business owner should be reviewing their commercial property coverage at least once a year.
I have decades of experience helping Arizona businesses get the right coverage at the best rate. I can review your current policy, and identify any possible gaps.
I'm located in Chandler, AZ. Give me a call and ask me any business insurance question.
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Photo, Bottega del pane, by Salva Barbera on Flickr. CC licensed.
Most business owners I talk to haven't reviewed their insurance coverage in several years. In this time of rising property values and rising costs, an Arizona small business owner should be reviewing their commercial property coverage at least once a year.
I have decades of experience helping Arizona businesses get the right coverage at the best rate. I can review your current policy, and identify any possible gaps.
I'm located in Chandler, AZ. Give me a call and ask me any business insurance question.
-------------------------------------
Photo, Bottega del pane, by Salva Barbera on Flickr. CC licensed.
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