What are your expectations in the event of a claim? That is the first thing you need to think about.

If your building is totally destroyed by a fire, would you rebuild? If so, you want to make sure you have an adequate amount of insurance that represents the actual rebuilding cost, or what a contractor would charge to rebuild your building. Also, your limit of insurance should include an amount for the cost of the debris removal of the fire damaged building. You may also have to take into consideration the increased cost of the latest building code requirements which can increase the cost of construction considerably.

When it comes to contents, if your policy provides replacement cost coverage, you need to consider the cost of replacing your existing equipment. Stock is valued on an actual cash value basis, or what you paid for it rather than what you are selling it for. If you are a tenant, then you also need to include the rebuilding cost of your leasehold improvements.

The other issue is coinsurance. A coinsurance clause is contained in every commercial property policy and applies to both building and contents. However, it only applies in the event of a partial loss. A coinsurance clause is applied as a percentage and is usually 90%. The coinsurance clause applies a formula that in essence states you must be insured to at least 90% of the replacement cost in order to receive 100% of your partial loss. In other words, the coinsurance clause allows your insurance company to pay you less than what you lost if you don’t carry enough insurance.

In some cases, an insurer will only offer you coverage for the actual cash value of the property. Or you may decide that you won’t rebuild and don’t want to pay the premium for replacement cost coverage. Actual cash value is defined as replacement cost less depreciation. Therefore, you would insure the property based on the value of its current condition, not the rebuilding cost. The drawback to choosing to insure on an actual cash value basis is in the event of a partial loss. You would not receive 100% of the cost of repairing the partial loss. This is because repairing the damage would require new materials. The cost of new materials is only provided by replacement cost coverage.