UNDERSTANDING INSURANCE
For the Bed & Breakfast or Country Inn Innkeeper
Property Insurance
I. Peril
A peril is the event insured against - the cause of possible loss. For example, fire is a peril. Your job is to pick which perils you want to insure your property against: there are three types of peril coverages from which to choose:
A. Special Causes of Loss: This is the most comprehensive coverage form available, protecting you against every peril unless the peril is specifically excluded.
B. Broad Form: This is a limited coverage form protecting your property against approximately 18 perils. Unless the peril is specifically stated in the policy, you do not have coverage.
C. Named Peril: This is the most limited coverage form, protecting your property against approximately 6 perils. Unless the peril is specifically stated in the policy, you do not have coverage.
II. Valuation
After the loss, valuation is the method the insurance company will use to determine how your property will be replaced. There are two valuation choices available: Replacement Cost Coverage and Actual Cash Value. Your job is to determine which method is best for you.
A. Replacement Cost Coverage: In the event of a loss, you will be paid for the loss without a deduction for depreciation.
When valuing your building, the building will be rebuilt up to the policy limits.
When valuing your contents, you will receive the current market value for the items. For example: suppose you paid $1,000 for a sofa 15 years ago and the sofa is destroyed by fire; also suppose, to replace the same sofa today, it would cost $7,000. If you have replacement cost coverage on your policy, you will be reimbursed for the $7,000 that you spent to replace your sofa.
Keep in mind you will not be paid any amount over your policy limit which is why determining the correct replacement cost amount for your building and contents is so important. Also, the coinsurance clause is a crucial factor; we will address coinsurance at length further in this discussion.
*****The trick with replacement cost is pre-determining the value of your property. First, you need to know the re-build value of your building. Second, you need to know the replacement cost of your contents.
There are several ways to determine the rebuild value of your building: your Insurance Agent or Real Estate Agent may have a method to determine the re-build value, or you could have a professional appraisal conducted. Remember - the re-build value and the re-sell values of your building are more than likely two very different figures.
To determine the replacement cost of your contents, "eye-ball" each room and come up with the dollar amount it would take to replace everything in that room at today's prices. Do this in every room of every building (don't forget to include the items in the attic, Christmas decoration, tools in the basement, your pot and pans, linens etc.). Add all of your figures together and you should come close to the replacement cost of your contents.
Hint: Use a video camera to record the interior and exterior of every building. Go into every room of every building and establish a visual record of your property. Remember to film the contents of your cabinets, drawers and closets; give a verbal description as you are filming. Once the tape is completed, store it at the bank in your safe deposit box. Hopefully, you will never need to use the tape.
B. Actual Cash Value: In the event of a loss, you will receive the Replacement Cost minus depreciation for your building and contents.
For example, suppose you paid $1,000 for a sofa 15 years ago; to purchase the same sofa today, you would spend $7,000. Now suppose the sofa has been destroyed by fire; on an Actual Cash Value basis, you will receive something less than $7,000 (replacement cost) as 15 years of depreciation will be deducted.
As with Replacement Cost coverage, you will only be reimbursed for your building and contents loss up to your policy limits.
Warning!!!!!!! Replacement Cost for Antiques: Unless there is a specific endorsement providing replacement cost coverage for your antiques, antiques are not on a replacement cost basis - they are on an Actual Cash Value basis. In other words, your claim reimbursement for antiques will include depreciation on the antiques. Antiques must be scheduled with a specific replacement cost amount in order to alleviate the depreciation problems.
III. COINSURANCE
One of the most pressing issues with property coverage is the amount of insurance. REMEMBER, THE REBUILD VALUE OF YOUR INN AND THE RESALE VALUE OF YOUR INN ARE TWO COMPLETELY DIFFERENT FIGURES. You must have the proper amount of insurance on your property to avoid a coinsurance penalty.
Coinsurance is one of the most critical and misunderstood clauses of a commercial insurance policy. The coinsurance clause requires you to carry a specified amount of insurance based on the rebuild value of the property insured; if you fail to comply with the clause, you will suffer a penalty in the event of a partial loss. For example, if the rebuild value of your inn is $250,000 and you have an 80% coinsurance clause (80% being the most common), then the building value reflected on your policy must be at least 80% of the total rebuild value-in this case you must insure the building for at least $200,000. If you do not insure for at least 80% of the rebuild value of your building, then the percentage that you are underinsured is the same percentage the Insurance Company will apply when paying a loss. Please keep in mind, the rebuild value of an Inn and the market value of an Inn are two entirely different figures.
If you refer to our original example, the rebuild value of your inn is $250,000. Because of the 80% coinsurance clause, you must insure the building for at least $200,000. However suppose your building is only insured for $100,000 and you have a kitchen fire with total building damages of $20,000--- you would expect to receive $20,000 from the Insurance Company for your $20,000 loss.
Unfortunately, since you did not comply with the coinsurance clause, a coinsurance penalty will be applied to the loss and you will not be fully reimbursed. The Insurance Company will derive the coinsurance penalty by using the percentage which you are underinsured, in this case 50% (The Coinsurance Equation is: The Amount Of Insurance You Actually Carried Divided By The Amount Of Insurance You Should Have Carried = Coinsurance Penalty - in this case $100,000/$200,000=50%) and apply that figure to your loss. You will only receive $10,000 for this $20,000 fire loss ($20,000 total loss multiplied by 50% coinsurance equals $10,000).
