June 15, 2009
By Monique Gaudet
Sinclair-Cockburn Financial Group

Imagine you suffered a fire loss at your business location. Your insurance company provided coverage on a blanket basis, subject to a 90 per cent co-insurance clause with replacement cost. The building and contents were a total loss. It was discovered that at the time of loss the values insured were 55 per cent of the actual replacement cost. In order to restore the facility and resume operations, you had to assume over 60 per cent of the reconstruction and replacement cost.

Although blanket limits of insurance and policy contracts written without a co-insurance penalty may allow some losses to be adequately insured, they should not be a substitute for accurate valuation. In many cases, policy holders base property values on market value at the time of acquisition of the asset, not the cost to replace or rebuild. Book value, or original cost less depreciation, may be used to report values. The fact is the actual cost to rebuild or repair a building, or replace equipment is generally far greater than the property’s book value or market value. In the event of a partial or total loss, you may make the grim discovery that you are significantly underinsured. You may face the very costly and unpleasant reality of having a financial burden you thought would have been taken care of by your insurance. Without proper, up-to-date limits to restore property, this unanticipated and considerable expense could cause the some people to struggle, or even fail to resume operations.

Replacement cost

Establishing the replacement cost of business machinery and equipment will require more effort. It usually requires that it be done on an item-by-item basis. You should contact equipment suppliers to obtain current replacement cost information. Consideration should also be given to issues such as increased cost of manufacturing, transportation costs on imported property, advancements in technology, obsolescence and custom designs.

Another important consideration in determining building replacement cost is the existence of municipal bylaws that regulate the reconstruction of damaged buildings and structures. Constantly increasing labour and material costs, debris removal costs, as well as geographic location, are key elements to understanding true property replacement value. These factors also need to be taken into account to determine insured values.  However, the most accurate way to establish the proper replacement cost is to have an appraisal completed by a qualified professional.  

Your contents coverage limit is usually based on a percentage of the amount of your building coverage. Depending on the type of policy you have (standard, broad or comprehensive), the amount ranges from 60 to 75 per cent. For example, if you have a comprehensive policy with $200,000 building coverage, then the amount of contents insurance you have is $150,000 (75 per cent of $200,000). While these amounts are adequate for most people, it may not be enough for your situation. The best way to determine how much coverage you need is to complete an inventory of all items and then consider how much it would cost today to purchase all of these items brand new. If this amount is greater than the coverage you have, consider buying more
contents coverage.
For more information regarding your personal insurance, contact Monique Gaudet at Sinclair-Cockburn Financial Group, 416-790-2164, or e-mail Monique.Gaudet@scfg.ca.