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It’s something business owners don’t like to think about, but it does happen. A fire or other devastating incident could bring a business to a complete halt. Any significant event could seriously damage inventory and force businesses to suspend operations.
While many might take comfort in having insurance and remembering that their premiums have been paid on time, they may not realize a static policy or simply making the payments is not always enough. With the economy changing and building materials and labor costs at sky-high levels, many business owners are finding out the hard way that they were underinsured. For too many, that means rebuilding or completely restoring operations can cost hundreds of thousands of dollars beyond what insurance will pay.
This is an all too common scenario in all industries. In fact, 75% of American businesses are underinsured, as reported by an Insureon survey.
Fortunately, lumber and building materials business owners can take steps to protect their business by reassessing and updating the values of their insurance policies.
Understand the problem
When insuring a lumber and building materials merchant, a multitude of factors must be considered to ensure that the coverage reflects the risk exposure of the business. For example, even if they don’t want to, business owners need to look beyond the initial price paid for a piece of equipment or a building.
Think of a home insurance policy: A homeowner may have paid $450,000 for a home five years ago and insured it for the 2017 appraisal of its total rebuilding cost of perhaps $350,000. With the costs of lumber and other building materials now skyrocketing, that same homeowner should expect the cost of rebuilding to be considerably higher, perhaps as high as $500,000. If the owner is only insured for $350,000, this additional $150,000 would be his responsibility. It’s no different for business owners.
To avoid this problem, business owners need to assess their risks as they stand today by estimating the total insured value of their risks and comparing those numbers to their current insurance limits. It’s an aspect of any business that needs to be regularly nurtured, reassessed and adjusted accordingly, especially in today’s economic climate.
One of the most common mistakes a business owner can make when making a valuation is guessing or “calculating” the value of something. It is essential that appraisals are carried out with the full picture of the business in mind, including an accurate assessment of the exhibits presented at each of the company’s locations.
A good first step to getting an accurate valuation is to ask your broker or insurer for help. For those who prefer an independent appraisal, business owners can obtain a third-party certified business appraisal. Although conducting an annual business valuation can be expensive, business owners should consider a thorough independent valuation at least every two to three years. The bottom line is that the cost of an independent appraisal pales in comparison to the reconstruction costs left to the insured when a property is underinsured.
A property and inventory valuation is particularly essential for companies in the lumber and building materials sector, as we have seen business boom in recent years. During the COVID-19 pandemic, the demand for lumber and building materials has increased with new interest in home renovations. While many industries experienced a slowdown in business and a subsequent decline in revenue, lumber and building materials merchant businesses experienced robust growth, made investments and increased inventory.
As a result, a number of lumber and building materials merchants have added new buildings to their property lists, doubled their inventory, and/or purchased new equipment. Often, in such a busy and hectic environment, certain operational aspects, such as the management of an insurance policy, take a back seat to meet customer demands. Lumber and building materials dealers need to ask themselves, “If almost everything about my business has changed except my insurance policy, will it be able to meet my current needs?” If my business suffers a loss, will my insurance coverage allow me the time and capital I need to get the operation back up and running without financially harming the business? »
Don’t go alone
Lumber and building materials merchants are open to a number of unique exposures that make them more vulnerable to fires and other high-severity incidents – not to mention the cyber risk that threatens all industries. The consequences of each of these events can be catastrophic for a company. Insurance exists to give these businesses the funds they need when they need it to resume operations and get back on their feet.
While evaluating a business in its entirety can be a daunting task, finding help can be easier than you think. Your insurer or broker can help you navigate the assessment process and help ensure that all of your exposures are covered. Consider the following when determining if your business is insured for its value:
- For property coverage, talk to your insurer and consider getting an up-to-date appraisal from an independent appraiser. Values should be reviewed and updated regularly.
- For inventory coverage, consider using a stock report form. For example, Pennsylvania Lumbermens Mutual Insurance Company (PLM) provides an inventory reporting form that allows business owners to report lumber and other inventory so that the insured can maintain limits at adequate levels.
- For business income coverage, be sure to complete a business income worksheet before any loss, talk to your insurer to make sure your coverage is up to your current income and total expenses. This coverage can be invaluable when a business faces loss of revenue related to a covered claim.
Ensuring your lumber and building materials business is insured for its value is critical in today’s economic environment. The best way to have peace of mind when it comes to making sure your business is insured for its current value is to consult your insurer or broker. PLM can help you with this process by providing assistance with comprehensive assessments of your company’s unique exposures.
As the oldest and largest mutual insurer serving the lumber and building materials industry, PLM can provide essential support to your business. For more information about our services, including business interruption coverage and more, please visit https://www.plmins.com/ or contact us at [email protected] or 1-800 -752-1895.