If you own or operate a business whose inventory varies throughout the year, a traditional commercial property insurance policy may not be sufficient in case of a large loss.
If your commercial property policy limits are based on the average inventory your organization carries throughout the year, and you have a total loss during a period when you are carrying additional inventory, your policy may not cover your losses in total. Conversely, if you set your policy limits based on the times when you have peak inventory, you may be overpaying for coverage.
Fortunately, there are specialized property insurance policies that are more flexible in terms of coverage.
Firms that need specialized policies include:
- Florists, which carry more stock around Valentine’s Day and Mother’s Day than they do most of the year.
- Retailers, which carry more inventory during the holiday season.
- Warehouses and manufacturers, which may have variable amounts of product on their premises with vastly different values from month to month, week to week or even more frequently.
Coverage options
Businesses in this situation should consider two coverage options:
Peak season coverage — This coverage is appropriate for firms that can predict those periods when their values will increase.
The coverage form states the location and type of the property, the amount of additional insurance, and the period during which the higher amount applies.
For example, it might show that insurance on goods for sale will increase by $100,000 from Oct. 1 to Jan. 1. This gives the business plenty of coverage for the busy time, but saves it from having to pay for all that coverage the rest of the year.
Value-reporting coverage — This coverage is for firms with asset and inventory values that fluctuate all year long. It requires the business to buy an amount of insurance large enough to take care of the peak periods.
The insurance company will charge a lower initial premium than that amount would ordinarily require. The firm then must make periodic reports of its values to the insurer. Depending on the option chosen, you may have to send reports weekly, monthly, quarterly or annually.
After the firm has submitted all of its reports for the policy period, the insurance company will determine the average values and calculate the final premium.
Firms that choose value-reporting coverage must take care to submit the required reports on time and accurately. The form gives the insurance company the right to reduce claim payments for losses to the property when reports are late.
The insurer can also reduce a loss payment if it finds that the policyholder underreported its values. The limit of insurance does not automatically increase if the reports show values higher than the limit; the firm must request an increase in coverage.
The takeaway
Any company with variable property values would be wise to consider purchasing one of these types of policies.
With some careful planning, a business can limit its insurance costs while still getting the coverage it needs.
Call us if you have questions about these policies or to discuss whether it’s appropriate for your operations.