Business Insurance Cover for Fire, Storm Damage, Flood and Major Perils

Cover for damage to your physical property including; building, contents and stock caused by one or more defined events or perils. You will generally find two types of cover available:

• Accidental Damage
• Defined Events

Accidental Damage (or AD) is a much broader policy and will cover any event resulting in physical damage to your property, unless it is specifically excluded (think, rust, gradual deterioration, property undergoing processing etc.).

Whereas a Defined Events policy will cover exactly that; Defined Events – these policies will list the types of events that must occur for the policy to respond e.g. Fire, Lightning, Storm, Impact etc.  Some insurers may also provide you with settlement options on either an Indemnity or Replacement value basis.  This is how your claim will be settled, if you opt for a replacement value – the sum insured you declare must represent the cost to replace all your contents and stock (including customers or third party goods you are responsible for) on a new for old basis.  Indemnity is the market value of the damaged or stolen item i.e. what it is worth on the second hand market. An indemnity option is only generally recommended for redundant contents and stock that you would not want to replace in the event of a claim.  

Average or Co-Insurance Clause and the Impact of Underinsurance

Some insurance policies contain an Average or Co-Insurance clause (this is common under Fire and Perils, and some Business Interruption Insurance Covers) whereby you must insure for the full replacement value of insured property. If you underinsure, your claim may be reduced in proportion to the amount of the underinsurance. 

For example, if you insure a $1 million property for $500,000 (half its actual replacement value), and a claim for the property is made for $500,000, then the Average/Co-Insurance amount that is paid would be half, making your settlement $250,000.  

Why? The amount of ‘Underinsurance’ in this scenario is 50%, so the insurer can apply that to the sum insured on the policy to determine your maximum entitlement.   Most policies have an allowance that the sum insured nominated on your policy must be within 80 – 90% of the actual replacement value before the underinsurance applies but this can vary from depending of the insurers policy coverage provided.                                        

What is 'Underinsurance' and why is it so important?

Underinsurance occurs when the sum of your insurance cover falls below the true cost of replacing or rebuilding your business at today's specifications.

Often, the full costs of rebuilding or replacing property after a major event are underestimated and the sum insured nominated on the policy may be inadequate. When setting the sum insured you need to consider not just the replacement cost of the building, contents and stock but other costs such as: removal of debris, additional costs for rebuilding based on new building requirements due to changes to building codes, heritage issues (if applicable), legal and professional fees such as architects, engineers, surveyors, site conditions and zoning restrictions (to name a few) – all of which can have a major financial impact of the sum insured and are factors  that you, as a business owner, may not be aware of. Failure to consider these additional costs when nominating your sum insured, will mean that in the event the sum insured is inadequate to cover these costs, then underinsurance in the policy may apply.