Business owners are often so busy that they rarely have time tostep back to re-evaluate their business insurance policies. Whilethis determination and work ethic are admirable, it could leave abusiness vulnerable and unprepared should disaster strike.

In the wood niche, building material dealers, manufacturers andsawmills are often so focused on running the business that theydon't ensure that the company and its growth are insured. Newinventory, machinery and equipment; building expansions; additionalwarehouse facilities and more all need to be properly insured so ifa catastrophe arises, the business can rebuild.

Claims adjusters see this all the time. They enter a buildingafter a fire or other devastating event, finding on site is verydifferent from what is described in the business owner'spolicy.

The insurance coverage is not enough to remove the debris, payfor the increased cost of building materials, and completerenovations to update the new building with the latest buildingcodes, let alone cover new equipment and a warehouse add-on.

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A growing problem

The issue of insurance-to-value (ITV) is an ever-growing concernfor all insurers. The Pennsylvania Lumbermens Mutual InsuranceCompany conducted a study on a sampling of its book of businessusing valuation software. The company found that its portfolioparalleled the industry with underreported values.

This raises a number of concerns, including the possibility ofexposing agents and brokers to errors and omissions claims. Oftenafter a loss, business owners are unable to build a new, comparablefacility because they were under-insured.

Consider a property claim on a manufacturing site where thepolicyholder was underinsured. The damage was estimated at$1,415,000, while the insured only carried $924,000 —nearly 20% less coverage than needed.

A hardware store was devastated by an accidental fire. A visitfrom the claims adjuster revealed the property was underinsuredwith coverage of $139,000 or only 39% of the $392,000 buildingvaluation.

The sweet spot

With today's technology and predictive tools, determiningaccurate ITV estimates should not be difficult. After the policy isbound, don't wait until a claim to check in with thepolicyholder.

Building valuations must not only adjust with the rate ofinflation, but the rising cost of building materials, electrical,plumbing and HVAC work, along with the cost of getting a newbuilding to comply with updated building codes. Too manybusinesses — nearly 40% of small businesses — areunable to afford to rebuild and simply close up shop after adevastating loss, according to the Federal Emergency ManagementAgency.

Insurance adjusters can play an important role in correctingthis problem. Adjusters who are on site after disasters that do notresult in a total loss can bring the current value of the propertyto the attention of the referring agent or broker, the carrier, andin some cases the policyholder. This can serve as a reminder forthe agent or broker to check in with their insureds and let themknow the coverage they have and what an updated estimate ofrebuilding their property would be.

By performing this due diligence, agents, brokers, adjusters andcarriers, can be sure their policyholders are getting the bestservice they can, while agents and brokers are protected fromE&O claims, and carriers avoid costly litigation.

Jeff Hendershot ([email protected]) is losscontrol manager for Pennsylvania Lumbermens Mutual InsuranceCompany, based in Philadelphia, Pa.

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