Let's look at why the insurance company paid less than the loss Joe incurred. Then we will look at some simple solutions to ensure you don't experience the same problem.
The first problem was the limits of insurance that Joe purchased. The replacement cost of the damaged building was $1,200,000. Mostly by oversight, the building was insured for only $800,000. Even though the amount of insurance was twice the amount of the loss, a coinsurance clause dictated that the loss settlement for the building should be shared based upon the percentage of the limit as it relates to the insurable value of the building. In this case the business owner was insuring the building to 66% of value. The policy he purchased required he buy an insurance limit of at least 90% of the $1,200,000 limit to prevent the coinsurance clause from being enforced.
The second problem was the loss of income coverage provided by his insurance policy. Joe exhausted the limit of insurance provided by his policy after four months, and the insurance company did not provide coverage for "extra expense" items. Extra expense items for Joe included notifying his customers of a temporary location, the rental of temporary facilities, and other expenses to get operations back up and running. The insurance policy language stipulated that it would pay for continuing wages for only some of Joe's key employees. Joe continued to pay salaries of other key employees while business was suspended, in order to ensure they did not find permanent employment elsewhere.
Joe had a long term relationship with his insurance agent. It was a friendly relationship, and claims had been paid in a prompt and professional manner. Complacency by Joe and his insurance agent was the prime cause of this claim nightmare. Joe should been aware that he was under insured and the cost to insure to value was only an additional $800 per year. Courts have routinely ruled that the purchaser of insurance is responsible to ensure they have the adequate coverage and limits, so Joe's agent may not be legally to blame. However, an agent has a moral duty to make sure their customers have appropriate limits or are aware of coverage and limit shortfalls.
Asking questions is the most effective way to ensure you have the appropriate limits or coverage? Knowing the right questions to ask can be a challenge. Most business owners don't have the time or energy to read a thick legal document, but leaving that to a third party is not an ideal situation. 60 to 120 days prior to you policy expiration is the best time to confirm your coverage. However, you have the right to request a review at any time.
Here are a few questions to ask your agent to confirm limits and coverage. You can download additional questions at no cost or obligation from here.
Building coverage questions
• What are my building limits?
• What cost per square foot, did you use to calculate the limits on my buildings?
• What did you use for the square footage on my buildings?
• Are my limits adequate to avoid any claim adjustment shortfall as it applies to coinsurance or agreed value clauses?
• If there is a partial loss to my buildings, and the city requires the building be demolished and rebuilt, how does your policy respond to this?
• If there is a total loss, what will be paid for increased cost of construction, for code and other requirements?
Business Income coverage questions
• Are you proposing specific limit, or actual loss sustained? If a specific limit, what is it?
• If applicable, how many months of coverage will I have?
• How do you determine who is considered a key employee? (Insurance company to pay for their salaries)
• How long will you pay employee salaries?
• Is extra expense included in the limit?
• What is the limit for extra expense?
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