By Arnold F. Mascali
It has been more than a decade since a major hurricane hit the US mainland, and even though Sandy was a reminder of what havoc a powerful storm can wreak, too many business owners are still unprepared to respond to a disaster.
Statistics show that more than 50% of small businesses fail within 2 years after sustaining significant property damage or loss. Protecting revenue - the life-blood of any sized business – combines practical loss mitigation efforts and affordable business interruption insurance coverage. Over the next few weeks, Procor is providing practical advice to businesses on best practices to avoid or limit losses.
Today we are focusing on a critical component of a business owner policy - the deductible.
Know The Deductible! Most business owners understand that a deductible reduces the amount of loss recoverable under an insurance policy, equating to the amount an insured will be required to contribute to any loss. The size of that deductible is directly related to the amount of premium paid. However, the deductible can be calculated in different ways, depending upon the terms and conditions of the property policy - A) as a fixed amount (say, $5,000); B) as a percentage of the loss (for example, 5% of the total loss; or, C) as a percentage of the total insured value. The differences in these methodologies are significant. By way of illustration, let’s assume a business asset (e.g. a warehouse) is valued at $1 Million. Let’s further assume that the warehouse sustains $250,000 of damage in a storm. Under the “fixed amount” suggested above in A, the deductible would be $5,000. Under scenario B, the deductible would be 5% of $250,000, or $12,500. And finally, if the policy states the deductible is a percentage of the total insured value, under example C the deductible amount would be 5% of $1 Million, or $50,000.
All three methods are “common” and thus can be requested by a policyholder when purchasing business owners insurance. But clearly the results can vary significantly, and can severely limit cash flow following an event. Speak to your insurance broker or agent about your deductible – and have contingencies in place to deal with the potential impact of that deductible on cash flow.