Are you adequately insured for your property and liability exposure? The recent University Towne Center fire brought to the forefront the importance of insuring to value. This fire was a reminder of how important it is to properly choose and implement the right insurance program.

Bill Brennan

The insurance marketplace is exceedingly difficult, both from a pricing and a placement standpoint. It is often the case that insurance buyers are rushed and, as such, tend to focus on the review and placement of their insurance programs rather than paying attention to the actual levels of insurance needed.

This being said, an underinsured loss can be devastating, both from a personal and a business standpoint. Due to the increasing cost of construction and the litigious environment in Southern California, it is more important than ever for insurance buyers to focus on the core coverage built into their commercial property and liability insurance program.

Most every commercial insurance program includes property and liability-related insurance coverage. Almost every commercial insurance package includes coverage for a building, personal property, business income and general liability exposures. There are few businesses, if any, that are not carrying these types of coverage.

The question then becomes, "Am I adequately insuring my exposure?" The procurement of insurance process can be difficult, tedious and time consuming, but it does not change the fact that proper attention and detail need to be paid to the assigning of limits. More than any other time in the insurance business, there is a higher incidence of claims and/or losses that are inadequately insured.

What can be done to properly insure against business exposures?

Property insurance

As mentioned above, the UTC fire brought to light the importance of adequately insuring for property-related exposures. This would include building, personal property and business income-related exposures. To properly and adequately insure for property exposures, the following procedures and plans should be implemented to engage the strongest insurance program possible:

* Real Property Valuation. Once every three years, it is prudent to have either an insurance carrier and/or licensed contractor evaluate your property exposure. This would include a building replacement valuation, as well as a personal property evaluation. Ultimately, an evaluation such as this will result in a better understanding of a company's exposure, and make the process of procuring the proper limits much easier.

Without such evaluations, it is difficult for the insured, the insurance broker and the insurance industry to adequately determine limits. Ultimately, the cost of not insuring to value can lead to an inability to return to business in the event of a large claim.

While a property evaluation is not needed every year, it is important to budget for such a study every two to four years to keep up with the changing cost and construction related to property exposure.

* Business Income Worksheet. When purchasing business income insurance coverage, most carriers will require a completed business income worksheet. Often businesses will not put the time and energy into these worksheets to determine the proper limit.

Business income is greatly underinsured for most businesses in Southern California. Basically, business income is going to cover lost business income, operating expenses and any extra expenses that would continue after a loss and during the restoration period of that loss. Without this coverage, it may be difficult to stay in business in the long run if a restoration period will be long and difficult.

This coverage is exceedingly important, and difficult to determine an adequate limit. The worksheets are designed to determine the type of limit needed. The payoff for completing and going through these worksheets in detail far outweighs the time it takes.

* Annual Inventory of Personal Property. It is also important to perform an annual inventory of the personal property to be insured. The performance of such an inventory will give the insurance buyer a clear understanding of the cost to replace any personal property included in the premises and/or locations.

Ultimately, the goal is to insure for a catastrophic-type loss and determine what the costs would be to replace all of the current personal property. This would include furniture, fixtures, stock, inventory and any other miscellaneous property owned on the premises. Again, without proper attention and annual review, these limits tend to be underinsured for most businesses.

Casualty

It is clear after reading any news periodical, judgments and damage payouts for tort liability-related claims are increasing significantly each year. It is not uncommon to hear about third-party tort liability judgments in excess of $10 million. In Southern California, litigation is increasing at a staggering rate, and it is important to purchase the proper amount of insurance now more than ever.

So many times the consensus is that a person or business is only sued for the insurance they have in place. This is a fallacy and is supported by the vast number of different judgments laid down over the past 10 years. A jury decision is not based on the insurance a company has in place, but rather the facts of the case and the resulting damages.

There are several steps an insurance buyer can take from a risk management standpoint to protect against large liability claims:

* Benchmarking Claims. It is important to review and/or research claim activity within a company's given industry and determine limit structure based on case history. Benchmarking limits can be accomplished by working hand in hand with an insurance broker and insurance carrier to understand potential exposures, and the recent history for claims in a given industry will assist in determining the liability limits needed to properly insure a given company's exposure.

* General Liability Applications. Similar to the business income application mentioned above, liability applications can be tedious and time consuming to complete, but the importance of these applications and the information provided within them help the insurance broker and the carrier determine a company's exposure and need for risk transfer. These applications are designed to determine overall exposure and provide you, the client, a better understanding of your risk.

* Umbrella Limits. It is important to review and procure quotations for umbrella limits every year. This will enable the insurance buyer to determine the cost of purchasing higher insurance limits and provide budgetary information for the year going forward in terms of an overall insurance program. As was mentioned earlier, the cost of insurance in this current marketplace is high, but the limits carried five and even 10 years ago are simply no longer adequate to keep up with today's litigious environment. More than ever, it is important to purchase increased liability limits on a regular basis.

In conclusion, it is important to pay attention to core property and liability insurance coverage. Often the focus is too much on price, and sometimes esoteric coverage, and not on the fundamental insurance coverage offered and available in the marketplace. With increased litigation, increased construction costs and overall risk exposure, it is essential to give the time and energy each year to properly insure for these exposures.

It is also important to partner with a good-standing insurance broker and maintain long-term relationships with insurance carriers that understand your business and understand your exposures. This makes it easier to insure to value, and brings continuity to your insurance program.

Ultimately, you need to look at what it would cost your business not to insure adequately, and the effects that a grossly underinsured event would have on your business.

Brennan is an account executive in the Commercial Department of Barney & Barney LLC. For information, call (858) 587-7404 or e-mail billb@barneyandbarney.com.