Not surprisingly, most people are neck-deep in running their own businesses and don’t really understand how their insurance works … and that can have catastrophic consequences.
You should have a basic understanding of what you’ll be paid if something happens to your business property. If you don’t get the money you need to replace it, how will you stay in business?
One way insurance companies pay for damaged or destroyed property is the Actual Cash Value (ACV) method. ACV is calculated as fair market value or cost less depreciation. Now think about that in this example …
What’s the value of … let’s say … a 5 year old refrigerator?
Whatever it’s worth, it’s most definitely a lot less than the cost of a new one, right? A new fridge might be $1,000 but the used one may be worth only $500.
With an ACV settlement, if that fridge is destroyed, you’ll get $500 from the insurance company. BUT, it will cost you $1,000 to buy a new one.
Now … that’s not necessarily a problem. It’s simply a choice. You have other options.
One of them is Replacement Cost … and under this method you essentially get “new for old”. When that $500 fridge is lost, the insurance company buys you a new one – they replace the lost property – as opposed to compensating you at actual cash value.
Of course, choosing Replacement Cost means higher premiums. After all, the insurance company has more at risk when insuring replacement cost. And more risk means more premium.
Neither option is right, and neither option is wrong. It depends on your individual circumstances and your capacity to keep some risk yourself in exchange for lower premiums. (By the way there are other options. I just want you to understand the basics.) And don’t forget, the value of your property changes from year to year.
In reality there are greater complexities, but if you understand the basic difference between Actual Cash Value and Replacement Cost, you’ll be well on your way to protecting your property to your desire and your budget.
Give me a call if you want to discuss this topic further, or to make sure your property is protected like you want it to be.
RICH KRASNOMOWITZ/ US INSURANCE AGENCY 866-588-1190
email – richk@usinsagency
