BUSINESS PERSONAL PROPERTY INSURANCE LIMITS OPTIONS
Retail and wholesale operations and manufacturers purchase business
personal property coverage to protect their equipment and inventory. It is very
important to establish an appropriate limit so that the amount of property on
hand at the time of the loss is sufficient to cover the loss and satisfy any
coinsurance requirements. It is also important for the premium to not be
excessive.
- Option 1: Insure for a limit equal to the highest value expected.
If the limit selected is
for the highest value anticipated during the year, it is adequate regardless of
when a loss occurs. However, the insured may pay a high price for that
protection because the values throughout the rest of the year may be
considerably lower.
- Option 2: Insure for a limit equal to the average value expected.
If average value
is used to determine the limit, the insured still pays a high premium but the
limit may not be adequate to cover a total loss. The insured could be over
insured most of the time and underinsured at the time of loss. Coinsurance
penalties may come into play if a loss occurs when values are higher than the
average limit selected.
- Option 3: Insure for a limit equal to the lowest value expected.
In this case, the premium
is lower, but the insured has a major out-of-pocket expense if the loss occurs
during any other inventory period. In addition to not having sufficient limits
in case of a total loss, a coinsurance penalty must also be considered. The
insured could decide to insure on a no-coinsurance basis. However, it loses the
benefit of the premium credit for insuring on a coinsurance basis,
package discount application and having access to certain coverage extensions
that are not available when limits are not at 80% coinsurance.
- Option 4: Request regular endorsements to change limits.
The insured can establish
the limit needed as of the inception date and then notify the agent to increase
and decrease limits throughout the year. This option is expensive because it
involves considerable attention and clerical effort on the part of the insured,
the agent, and the insurance company. In addition, this approach is subject to
errors in limits and dates. However, it does have the benefit of having the
proper limits in place at the time needed.
- Option 5: Use the Peak Season Endorsement.
After the insured selects
a limit that is sufficient most of the time, the attachment of a peak season
endorsement allows it to vary those limits during selected time periods. The
insured establishes the higher limits and time periods as needed, based on its
knowledge of its business cycles. While this approach is flexible, the amount
of coverage needed at the time of loss may not be adequate if the limit or dates
selected are incorrect. In addition, the insured's premium charge may be higher
because the limits needed were not as high as expected (or the dates that
higher limits were needed were set too long).
- Option 6: Use a Value Reporting Form.
This option matches the
premium with the exposure and the insured purchases only the amount of coverage
needed. However, the insured must be aware of its responsibilities and the
potential penalties before using this form and approach. This analysis is of
the Insurance Services Office (ISO) CP 13 10–Value Reporting Form but this
approach also applies to most value reporting forms.
HOW THE REPORTING FORM MEETS THE INSURED'S NEEDS
If the insured wants to only pay for the coverage needed at the time of
loss, the reporting form is the best choice. The insured selects the highest
limit anticipated to be needed in the coming policy year. A deposit
premium is charged based on 75% of that limit. That high limit is the limit for
the entire year and, therefore, available to pay for any loss that
may occur. At the end of the year, the insurance company calculates a premium
based on the reports provided by the insured throughout the year. If the
premium is higher than the 75% deposit the insured pays the additional premium but
if it is less, the insurance company returns the premium. This way, the insured
pays only for the limits needed.
The reporting method is not one size-fits-all. The insured has
many options. The insured chooses the type of personal property it will report,
the way it will provide reports, and the reporting interval or frequency. All
or just a portion of covered business personal property can be reported. Other
property can be covered on a specific basis. In many cases, the insured covers
all other business personal property on a specific or coinsurance basis and
reports only inventory. The insured reports the specific property on the report
along with the inventory figure when it uses this approach.
Because of the many options available, the option selected must be
documented and reporting made in accordance with that option. As an example, if
a specific property is not to be reported, it must be clearly
identified as such. Otherwise, mistakes happen, there is confusion, and
penalties are applied.
