Legacy Digest

How Business Personal Property and Business Income Coverage Protect Your Business From Loss

Even if you don’t own a building and have no reason to insure one, your business might still need commercial property insurance coverage to help cover things like your business personal property or your business income. If you’ve invested in equipment or inventory, for example, it makes all the sense in the world to protect the value of that investment with insurance.

Our team at Legacy Partners is committed to helping businessowners understand their insurance so they know what risks they face and how insurance can help protect against those risks. Here’s a detailed look at business personal property and business income coverage, and how these can help you protect your investment in your business.

Understanding Business Personal Property Insurance

One type of commercial property insurance that is commonly purchased by businesses is known as Business Personal Property (BPP) insurance. Business personal property insurance covers your real property, known as tangible assets, but not your intangible assets. Your tangible assets are items you can physically see or touch, such as a desk or computer. For these assets, their value is easily defined and can be covered by a business personal property policy.

The purpose of this insurance is to help protect your business against damaged or stolen tangible business property. If something were to happen to your property, you’d need to replace it, and that’s where insurance can keep your business operating smoothly.

What Types Of Things Are Considered BPP?

The definition of BPP can be pretty broad in nature, as it encompasses numerous different categories of objects. One way people like to think of BPP is that if you were to turn a building upside down and shake it, BPP is all the stuff that would fall out of the building. While a helpful image, it isn’t quite as broad as the categories of items that would be included. For example, all of the following categories are typically thought of as business personal property:

• Office supplies: Pens, staplers, paper, and filing cabinets
• Furniture: Chairs, desks, and tables
• Furnishings: Rugs, blinds, and curtains
• Computers: Desktops and laptops
• Electronics: TVs, Teleconferencing Equipment, smartphones and tablets, scanners, and printers.
• Equipment: Manufacturing equipment and tools
• Inventory: Products for sale

This is certainly not an exhaustive list, but helps paint the picture of what types of things are included.

What Perils Are Covered?

As is true of commercial building coverage as well, you have the choice between protecting against the basic perils (fire, lightning, explosion, smoke, windstorm, hail, riot or civil commotion, sprinkler leakage, aircraft/vehicle collision, vandalism, sinkhole collapse, and volcanic action), broad perils (all those perils, plus falling objects, water damage from burst pipes or leaking appliances/equipment, and weight of ice, snow, or sleet), or special perils (the broadest option, which covers all perils not specifically excluded on the policy).

Most people choose the “Special” causes of loss coverage form which typically leaves only a small subset of exclusions like flood, earthquake, war, nuclear accident, landslide/mudslide, and sewer/water backup, some of which you can separately insure against by purchasing specific coverage.

How Much Insurance Do You Need?

The decision how much you purchase is generally up to you, but subject to a couple primary considerations:

Replacement Cost versus Actual Cash Value

First, you need to decide whether you want insurance for your business personal property to cover the full replacement cost or just the actual cash value of it. “Replacement cost” covers the full cost to get you a brand new replacement; “actual cash value” is the replacement cost minus its depreciation due to age and wear, meaning you would receive less money for older property, and you won’t get enough in the event of a claim to get brand new items.

Co-Insurance

Next, you need to evaluate what the actual replacement cost is of all your business personal property. You need to do a reasonably thorough inventory of your business personal property assets and determine what it would cost to replace them. Ultimately, you’ll likely need to pick a limit that is at least 80% or 90% of the total value of your business personal property, depending on the co-insurance percentage specified in your policy. This percentage is the amount of total insurance to value you need to carry to avoid a co-insurance penalty. While you can select 100% co-insurance, it leaves you no wiggle room on valuation, so we typically don’t recommend it.

If you don’t carry enough insurance, you can get hit with a co-insurance penalty. If you have $50,000 of inventory, but you only insure it for $25,000, then:

• If you have a total loss of all $50,000, you’ll get $25,000 from the carrier (less any deductible), and you’ll have to pay for the other $25,000 out of pocket if you want to replace it.
• If you have a partial loss of $20,000, and you have a 90% coinsurance provision, then you’d be required to maintain $45,000 of BPP coverage. If you only had $25,000 of coverage, then you’re only carrying about 55.56% of the required insurance. You would only receive $11,111.11 (less any deductible) because you failed to satisfy the co-insurance requirement.

To avoid this, we typically encourage our clients to review their business personal property limits regularly, and suggest at a minimum annual increases of around 5% to help keep up with the cost of inflation.

What Else Should You Consider When Evaluating Business Personal Property?

For many business owners, covering your own business personal property while it’s at one of your business’s locations from loss due to the Special causes of loss is sufficient. But even if you have this coverage in place, there can be some other situations to consider whether other specific coverages are needed.

• Other Perils: You may wish to purchase coverage from additional perils such as flood, earthquake, or water/sewer backup to help protect against causes of loss that aren’t covered on a standard special cause of loss form.
• Extended Location: Many commercial property policies will provide coverage only within a certain distance of a building. If you store inventory outside, you may need to specifically describe where that inventory is as a separate location, or alter the distance limitations to make sure all your property is covered.
• Property In Transit: As noted above, standard BPP coverage is limited to a specific location. If your business is moving BPP around frequently to jobsites, you may need to consider coverage for property in transit (typically done on a commercial property form) or an inland marine coverage (which is its own special coverage form for mobile property and equipment).
• Property of Others: If your business takes in the goods of others and holds onto them, you may actually need coverage for the business personal property of others. This is typically considered a separate coverage and may be excluded from business personal property.
• Spoilage: If you have property that needs to be refrigerated, you will likely need to purchase spoilage coverage to help cover situations where your refrigeration equipment breaks down or you lose power and your property goes bad before you can sell it.

Who Needs Business Personal Property Coverage?

The reality is that almost every business has some type of tangible physical property involved in it, and for the most part, there’s a benefit to every business in insuring that tangible property.

• Small businesses that carry inventory which is directly sold to customers could go out of business if they couldn’t afford to replace their inventory out of pocket.
• Restaurants that lose everything in a fire might not be able to afford to replace all of their tables, chairs, and other cooking equipment.
• Manufacturing companies may need the coverage to replace not just the inventory but all of their production equipment.

Any business—big or small—with tangible personal property should consider insuring it against loss because the cost of insuring it is much smaller than the cost the business would face if they had to try to replace it out of pocket.

Understanding Business Income Coverage

Another important coverage for businesses of all sizes is business income coverage, sometimes referred to as business interruption coverage. This coverage can help protect your business from the stream of lost revenue and ongoing payment obligations it faces in the event of a covered cause of loss. If your store were to burn down and you lost all of your inventory, business personal property coverage could replace the value of the inventory, but what about all of the lost revenue from sales you weren’t able to fulfill? That’s where business income coverage steps in to protect you.

What Does Business Income Actually Cover?

If your business suffers a catastrophic loss from a covered peril, then business income is incredibly important to help keep the business afloat while you’re getting back on your feet. It typically can cover any number of things, including:

• Lost Income: If your business loses out on sales because of physical property damage, business interruption insurance will help compensate your business for the loss of income. Typically, your financial records regarding booked sales lost or even historical sales are used to determine how much money you’re eligible to receive.
• Rent or Lease Payments: Even if your business has to close temporarily, you may still have to pay rent to a landlord or pay for equipment you had leased.
• Wages: You may need to continue paying your employees, especially salaried employees, to retain them while your business is getting back on its feet. Many policies will help provide up to a year of payroll for each such employee.
• Loans: Business income can help step in to pay for ongoing loan commitments, for example, to cover commitments through a Small Business Administration (SBA) loan.
• Relocation Expenses: You may be able to get help from business income coverage to cover the fees of moving your company to a temporary location, and even cover the additional rent cost for it.
• Taxes: Payments from business income can also go towards helping fund continuing quarterly or annual tax obligations.

Who Needs Business Income Coverage?

While almost every business would benefit from having business income coverage in place, there are certainly some risk factors for a business which make the coverage even more important. It could be even more important for you to carry business income coverage if your business:

• Operates out of a fixed location, such as a storefront or warehouse.
• Requires the use of specific equipment or machinery that would be difficult to quickly replace.
• Relies on the sale of inventory or supplies.
• Has high daily operating costs.
• Owes loans, leases, or mortgage payments.
• Is dependent on a physical location to generate income.

If your business would lose out on income if your property was destroyed, business income coverage can help protect against that loss.

Conclusion

Businesses of all types and sizes should strongly consider adding business personal property and business income coverage to their insurance policies. The potential for catastrophic loss without it could be enough to bankrupt any business if they can’t afford to cover all of these expenses out of pocket. For a fraction of the cost, insurance can help make sure that the business keeps operating successfully even when something terrible happens.

For personalized advice and comprehensive coverage options, contact Legacy Partners Insurance. As an independent agency serving our customers in Michigan and all over the United States, our licensed professionals are ready to assist you with all your insurance needs. Call us today to ensure your business is properly protected.