HOW TO determine insurance needs for buildings, equipment.

When insuring commercial buildings and equipment, the most important element is setting the proper value or limit of insurance. It may seem like a simple point, but setting improper values is the most common error made on a commercial insurance policy.

The first step of valuation is to determine the replacement cost of the asset. In the case of a building, the replacement cost can be determined by a local contractor. Basically, the cost per square foot, taking into account any upgrades (such as finished basements, electrical equipment etc.) is the method of determining building value. Too many clients mistake replacement cost - defined as the cost of construction of same quality and likeness - with market value. What a business pays for a building, and what the business should insure it for are two different issues.

The valuation method differs for insuring equipment. Generally, what a business owner pays for the equipment is a starting point to. determine the replacement cost. But take note, an accountant's book value of equipment is not an indication of valuing the asset.

The business owner should ask the following questions when determining the value of equipment:

How much will it cost to order new equipment and have it shipped and installed?

In the case of older equipment, what would I replace existing equipment with using today's technology?

Would replacement cost be more or less (for example, when replacing computer equipment)?

All of these questions should be taken into consideration when determining an appropriate limit on your insurance policy. The replacement cost is what you have to pay to get the same quality and likeness as your existing equipment.

The majority of commercial property insurance policies are written on a replacement-cost basis. The alternative is to insure on an actual cash value basis, which basically is a depreciated replacement cost value. Insuring your assets on 'actual cash value' allows you to reduce the limit of insurance to the depreciated value of the asset. This is important for cost-conscious clients because the lower the value, the lower the premium.

A word of caution - it is critical to assess the importance of that asset to your business. If the asset has to be replaced in the event of a claim, insure it on a replacement cost basis. It cannot be emphasised enough how stressful a claims situation can be. Depending on the severity of the loss, you, as a building owner, could be shut down for months not to mention bodily injuries could be involved. Don't jeopardize your company's future over a few hundred dollars of insurance. Insuring to replacement cost gives you the option to either replace the asset or take actual cash value settlement.

Proper replacement cost and actual cash value evaluations are critical because commercial insurance contracts include co-insurance clauses. The co-insurance clause is an insurance company's safeguard to make sure the clients are properly insuring the assets to value. Basically this clause stipulates that if the client does not insure their building and equipment to proper replacement or actual cash value limits, the client will have to pay for part of the loss regardless if the loss is a partial or total loss. Generally, your commercial policy will state a co-insurance based on a percentage. The co-insurance clause requires the business to insure within 80 to 90 per cent of the replacement or actual cash value calculations.

The importance of insuring to value cannot be emphasized enough. In the event of a claim, the claims adjuster will automatically check if your asset values meet the policy limits. If your limits are less than the required values, you will pay for part of the claim regardless if it is a partial or total loss. This is standard procedure. One insurer estimates that 40 per cent of commercial clients do not insure to value. Don't wait for a claim; review it regularly with your insurance broker.

With respect to purchasing a commercial insurance policy, it is not necessary to place all of your focus on the policy. Evaluate the individual prescribing the coverage. Insurance policies can be written in hundreds of combinations. You need a competent commercial insurance broker to guide you through the process.

When selecting a commercial insurance brokerage it is very important to assess the experience and knowledge of your insurance broker, not only with respect to insurance but also within your industry. Your insurance broker will be designing an insurance program based on the information you provide. The point is, broker selection is a key element in purchasing a commercial policy.

Consider the following key points when going through the process of insuring the assets of your business:

* Importance of insuring to value

* Evaluate the experience and knowledge of your broker

* Disclose all information regarding your business, including a description of operations and prior claims.

* Allow your broker to design a program around your current needs, not your existing insurance policy.

* Meet with your insurance broker for program review on a regular basis.